As a financial planner the question that I am most often asked is some version of “Can I Retire?” The Employee Benefit Research Institute (EBRI) recently released its latest Retirement Confidence Survey. The results were depressing to say the least; overall retirement confidence is at record lows among those questioned in EBRI’s 23rd annual survey. Are you on track to a comfortable retirement? It is essential that Baby Boomers and others approaching retirement address this issue.
Ask yourself a few questions:
What kind of lifestyle do you want in retirement?
You’ll find general rules of thumb indicating you need anywhere from 70% to more than 100% of your pre-retirement income during retirement. Take a look at your individual circumstances and what you plan to do in retirement.
- Will your mortgage be paid off?
- Do you plan to travel?
- Will you live in an area with a relatively high or low cost of living?
Remember spending during retirement is not uniform. You will likely be more active earlier in your retirement. Though you may spend less on activities as you age, it is likely that your medical costs will increase as you age.
How much can you expect from Social Security?
Social Security benefits were never designed to be the sole source of retirement income, but they are still a valuable source of retirement income. Those with lower incomes will find that Social Security replaces a higher percentage of their pre-retirement income than those with higher incomes.
What other sources of retirement income will you have?
Other potential sources of retirement income might include a defined-benefit pension plan; individual retirement accounts (IRAs); your retirement plan, and your spouse’s retirement plan. If you have other investments, it is important to have a strategy that maximizes these assets for your retirement.
If you are fortunate enough to be covered by a workplace pension, be sure to understand how much you will receive at various ages. Look at your options in terms of survivor benefits should you predecease your spouse. If you have the option to take a lump-sum distribution it might make sense to roll this over to an IRA. Also determine if your employer offers any sort of insurance coverage for retirees.
Where does this leave me?
At this point let’s take a look at where you are. We’ll assume that you determine that you need $100,000 per year to cover your retirement needs on a gross (before taxes are paid) basis. Let’s assume also that your combined Social Security will be $30,000 per year and that there will be $20,000 in pension income. The retirement gap is:
Gap to be filled from other sources
Where will this $50,000 come from? The most likely source is your retirement savings. This might include 401(k)s, IRAs, taxable accounts, self-employment retirement accounts, the sale of a business, and inheritance, earnings during retirement, or other sources.
My fellow NAPFA member Bill Bengen states that most retirees can safely withdraw 4% of their initial nest egg and expect to have their money last them for at least 30 years. What does this mean?
In order to generate $50,000 per year you would need a lump sum of $1.2 million at retirement.
Everybody’s circumstances are different. Many of us do not have a pension or even a workplace retirement plan.
Take a look at where you stand and take action
While the low retirement confidence numbers in the EBRI Survey may be due in some part to the poor economic conditions we have experienced in recent years, I suspect some of this is due to a lack of planning as well.
Some steps that you can take if you feel that you are behind include:
- Save as much as possible in your 401(k) or other workplace retirement plan
- Contribute to an IRA
- If you are self-employed start a retirement plan for yourself
- Keep your spending in check
- Scale back on your lifestyle if needed
- Plan to delay your retirement or to work part-time during retirement
Providing for a comfortable retirement takes planning. Don’t be lulled into thinking your 401(k) plan alone will be enough. If you haven’t put together a financial plan, don’t be afraid to enlist the aid of a professional if you need help.
Please contact me with your investing and financial planning questions.
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