Investment planning is different from retirement planning and as retirement age Americans sit helplessly waiting for a cure to COVID-19, retirement portfolios are starting to amass losses as the stock market plunges into a bear market.
When you plan for retirement you're really deciding how much money you'll need for the rest of your life and calculating how much income you will need for retirement isn’t necessarily an easy task.
Most people talk about living on a fixed income that includes Social Security, because they're guaranteed to receive that income through retirement. To supplement Social Security, many people add savings of their own, because Social Security may not cover all their wants and needs. Also, the future of Social Security is becoming more and more uncertain.
As you review your retirement statement, you may be thinking it seems like a good amount of money now. What's wrong with having a fixed income? Although a fixed income is fine, as long as your expenses are fixed - and considering the overall trends and inflation, the money you save today could lose value over time and that might impact your purchasing power in ways you hadn't planned.
Say you're retired and you have a fixed income. For now it covers the things you have to spend money on like housing, food, fuel and healthcare costs. You must also consider the things you want to spend your money on like:
* A night at the movies
* A trip to the mall or
* A special occasion
Here are the common areas of retirement spending:
- Housing: rent or mortgage payments, property taxes, homeowners or renters insurance, property repairs and maintenance
- Food and grocery
- Utilities: gas, electric, telephone, cell, water, cable TV
- Transportation: car payments, auto insurance, gas, car upkeep and repairs, public transportation
- Insurance: medical, dental, disability, life, long-term care
- Healthcare costs not paid by insurance: deductibles, co-pays, prescription drugs
- Care services for parents or loved ones: costs for nursing home, home health aide, or other type of assisted living services
- Recreation: eating out, entertainment & hobbies, travel
- Debt: personal loans, business loans, credit card payments
- Taxes: income (federal and state), capital gains tax, alternative minimum tax (if applicable)
- Education: personal student loans, children's student loans or educational expenses, grandchildren's student loans or educational expenses
- Investments: contributions to IRAs, investment accounts, annuities, any other portfolio assets
- Gifts: charitable and personal giving
- Miscellaneous: personal caretaking, club memberships, subscriptions, pets, so on
Healthcare will become more costly as you go along in retirement as well. Include some buffer in your projections for health costs. Ask for guidance from a financial professional to help you confirm that your estimates are on point and are realistic.
As the years go on, you can bet your costs will go up and meanwhile your fixed income is well, fixed. If you enter retirement in a bear market, a sequence of returns could greatly reduce your retirement income.
So then what do you do? Well you can't avoid your medical bills. Your housing costs such as maintenance, insurance, property taxes, utilities, aren't going away, and there's only so much you can cut from your food budget, such as cookies, snacks and sodas.
So you end up having to hold back on the things you really enjoy, like:
- Trying a new restaurant you've been meaning to visit
- Weekend out of town
- Your grandkids birthday gifts
Suddenly, it sounds a lot less fun. Doesn't it? If you're relying on sources that offer limited ways to increase income, there could be some tough decisions ahead.
Although you may not even know where to start when trying to estimate how much retirement money you will need, there are a few rules of thumb that you can follow to help get you started.
Start With A Baseline of Your Current Lifestyle and Income
The first thing to look at is the amount of income that you need right now. This will give you a baseline to work off. Say your current lifestyle costs $60,000 of income per year to support. Your future retirement lifestyle will probably need an income that is somewhere near that level, unless major medical expenses arise (which can happen).
If you needed much more income than that to support your future lifestyle, you might consider delaying Social Security. Your benefits will accrue with each year you wait. If you kept on working, it would also give you more time to invest and grow your nest egg.
The SECURE Act allows you to keep contributing to your retirement plan as long as you are still employed in the workforce regardless of age. Ultimately, that would help you be even better prepared for the transition to a secure and comfortable retirement.
Since your current income supports your present lifestyle, it's a natural starting point to estimate your retirement income needs.
Calculate Your Expected Future Income
From there, start doing a deep dive into numbers. Write down estimates for expected future retirement spending. The more you go into your current expenses and really think about how those expenses might change over time, the better prepared you will be when you switch over to retirement.
Don't forget to include inflation in your projections here. Some expenses are likely to change during your retirement, such as the house payment or educational expenses of loved ones.
How Long Will Your Retirement Last?
You will need to decide the age you wish to retire and how long you expect for your retirement to last. That will determine how many years of annual income you will need that you were estimating above.
It’s true that people are living longer, however family history and your personal medical history can provide strong clues of how long you might live for. Nevertheless, err on the side of caution and use a prudent timeline for your planning. A 30-year span or longer is a conservative time window to use in your income planning.
Identify Your Sources of Retirement Income
From there, identify your sources of income.
What sources of retirement income will be available to you?
Does your employer offer you a pension?
What age will you claim Social Security?
How much will you receive in monthly payouts from Social Security by claiming your benefits at that point?
Your other sources of income are likely to include a 401(k) or other retirement plan, IRA, taxable brokerage accounts, and other places you might hold investments. How much cash-flow you receive from these sources will depend on how much you have invested, the returns you earn, and their taxable status.
If you keep working in retirement, your earnings can be another source of income. If you do find any shortfalls between your future annual retirement income needs and what your retirement assets will generate, act now. There are a variety of steps you can take to overcome the gaps:
- Cut back on expenses now so you have more to save.
- Delay retirement by working longer and putting away more of your earnings for retirement savings.
- Change your retirement goals and lifestyle expectations so you don't need as much money.
- Work part-time in retirement to supplement your other income sources.
- Look for ways to supplement the gaps with income-supplementing mixes of higher-growth investments and annuities.
These measures can go a long way towards funding the retirement income gap between your current income and your projected retirement income. What if it looks like you won't have enough assets to pay for your retirement long-term? Then consider pursuing a strategic combination of these measures to help fill in the gaps.
Plan for an Income-Certain Retirement
Estimating the amount of money that you will need to retire isn’t easy. But following the rules of thumb laid out here can help you accurately project the amount of income you will need for a comfortable retirement lifestyle.
Don’t forget about other possible sources of income like reverse mortgages if your other means of cash-flow are a bit sparse. These loans can provide income for vital needs such as medical expenses, long-term care, or other major healthcare costs if you have paid off your home loan.
Supplementing your retirement savings with an annuity, provides the potential for your retirement income to increase through an income benefit, provides critical long-term care benefits and provides guaranteed income, just like Social Security.
While Social Security may offer a cost-of-living adjustment that can help address the effects of inflation, having an annuity that provides the opportunity for increasing income lets you do more with your savings. So you can still afford the things you have to spend money on, for as long as you live.
Also, when that income has the potential for annual increases it's a way to maintain the standard of living you want to have in retirement, so you can spend your money on the things you really care about. That's the way it should be.
Ask an experienced financial professional for guidance in determining how much money you will need for retirement – and for exploring your options to generate reliable income. They can help you build a rock-solid strategy that lets you enjoy a predictable lifestyle for the long haul.
Jennifer Lang Financial Services is an Independent Agent and closely monitors the most competitive life insurance carrier rates to help you get the best possible fixed index annuity. Get in touch with us to get a financial plan design that works best for your specific circumstances.