Do you know if you have enough to retire? Do you want to know how to figure it out? Begin by figuring out what you think you will need. A budget worksheet is easy to make. It essentially is a bunch of columns. In column one list each expenditure. Be sure to include everything you routinely spend on each month. Include auto, auto repairs, house payments, real estate taxes, 401k contributions and other savings, healthcare and insurance premiums, meals out, etc. Make sure you get everything. Remember you are doing this for yourself.
Once you have figured out what you spend each month, run through each item to determine if it is likely to continue after you retire and whether or not it will change. For example, people often find their clothing, fuel, and dining out budgets will go down. Other things like travel and recreation may go up. The thing to remember is that for most people, elective activities often go up when they retire as you now have a lot more time on your hands. One way to address this that people rave about is to volunteer somewhere. Not only will it give your life structure, which is likely to be lacking when you retire, it is good for the soul, and the pocket book.
After you have figured out what you think you will need, take a look at what income you have coming in. In this phase we don’t look at retirement savings, we look at retirement income. What you are looking for is safe, predictable income that you cannot outlive. These sources come in the form of Social Security, pensions, perhaps a trust fund. Any kind of regular income stream you have.
It’s also important to make sure you elect your income in a manner appropriate to your circumstances. For example, if you have a pension and you are married, be sure to elect a joint and survivor option. Also, be sure to have a Social Security analysis done to make sure you are getting a maximum lifetime benefit. If you need help with this, which most people do, give us a call and we can either help you, or direct you to someone who can.
If you are not careful, income planning can be a trap. It can be very easy to fall into thinking that can sink your retirement ship. For example, one thing I hear nearly universally from people goes along the lines that planning for late life can interfere with earlier life when you are more active and more able to “do stuff.” People have a “more now – less later,” or “less now – more later” mindset. This stems from the way most people do their planning, using a “forward” planning, or “first things first” approach. While that may seem logical, it’s usually the worst and least efficient approach.
Why? Because if deemphasizes the most important aspect of pensions and Social Security: that they last the rest of your life, no matter how long we live. If you take a traditional approach, you may be inclined to only look at the cash flow, and not the long-term challenges of planning. With 25 to 30 years of potential retirement, this can be catastrophic. For example, people will often take Social Security early so they can get more money now, but short-changing their later selves, and can lead to a short-term gain and long-term penalty result.
It’s much better to look at your whole retirement lifespan and figure out how much you will need for a lifetime, and then plan for that. The catch is, of course, you have no idea what that will be, as you have no idea how long you will live. That often leads to avoidance, which is what causes people to make bad decisions. The truth is, it’s not that hard to plan for unknowable periods of time. You simply have to use instruments that pay income as long as you are alive. But in order for it to work, you have to maximize that lifetime payout.
Obviously, Social Security and pensions are in this category. No matter how long you live, these will continue to pay income, and in some cases, such as Social Security, even provide an inflation adjustment. This is like gold! No matter how long you live, you know you will have lifetime income.
But what about now? That’s where you want to use your investments. See, the very most powerful threats to your retirement are potential to outlive your money, and the potential to lose it in the market. Advisors understand that market volatility, while it can sometimes be leveraged to your advantage while in the accumulation phase, can kill you during the spending phase of your retirement. That’s why they typically refer to what’s known as the “4% rule.” This rule states that in order to have no more than a 10% chance of running out of money in retirement, you should pay yourself no more than 4% a year, plus a modest inflation bump each year.
Now, think for a moment. If you could nail down that long-term income with guarantees by using your sources of guaranteed long-term income most efficiently, you may be able to eliminate one of the most deadly threats to your retirement – longevity risk. Then you might actually be able to use your retirement savings more efficiently, and get more than 4% a year from it. By doing that, we have opened the possibility of a “more now – more later” retirement.
Stay tuned for our next column. We will be looking at the real secret to making this approach work for you.
Credits: Stephen Kelley