Objective information about financial planning, investments, and retirement plans

A Pre-Retirement Financial Checklist

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Are you within a few years of retirement? It’s time to get your financial house in order. Here are several items to include on your pre-retirement financial checklist.

 Review your company benefits  

Your 401(k) plan might be your largest and most significant employee benefit, but there may be others to consider as well. Does your company offer any sort of retiree medical coverage? Are there other benefits that you can continue at reduced group rates?

In the case of your 401(k) you will have choices to make at retirement.  You will need to determine if you want to leave it with your soon-to-be-former employer, roll it into an IRA, or take a distribution. The last choice will likely result in a hefty tax bill, so this is generally not a good idea for most folks.

Do you have company stock options that you haven’t exercised? Check the rules here. Speaking of company stock, there are special rules called net unrealized appreciation to consider when dealing with company stock held in your 401(k) plan.

Do you have a pension from your current or former employer?

While a pension is certainly an employee benefit, I feel that it deserved its own section.  You might have several decisions to make with regard to your pension benefit if you are fortunate enough to be covered by one.

  • Do you take the benefit immediately upon retirement, or wait?
  • If you have the option, do you take the pension as a lump-sum and roll over to an IRA or take it as a monthly annuity?
  • Generally there will be several annuity payment options to consider, which one is right for your situation?  

These decisions should be made in the context of your overall financial situation and your ability to effectively manage a lump sum. Since any lump sum would be taxable, it is usually advisable for you to roll it over into a tax-deferred account such as an IRA. If you have earned a pension benefit from a former employer, be sure to contact your old company to get all of the details and to make sure they have your current address and contact information so there are no delays or glitches when you want to start drawing on this pension.

Determine your Social Security benefits and when to take them

While you can start taking Social Security at age 62, there is a significant reduction in your monthly benefit as opposed to waiting until your full retirement age. Further, if you can wait until age 70 your benefit level continues to grow. If you are married the planning should involve both spouses’ benefits. There are a number of sophisticated strategies surrounding couples and whose benefits to take and when so planning is very critical here.

Review all of your retirement financial resources 

Over the course of your working life you have likely accumulated a variety of investments and other assets that can be used to fund your retirement which might include:

  • Your 401(k) or similar retirement plan such as a 401(b) or other defined contribution plan.
  • IRA accounts, both traditional and Roth.
  • A pension.
  • Stock options or restricted stock units.
  • Social Security
  • Taxable investment accounts.
  • Cash, savings accounts, CDs, etc.
  • Annuities
  • Cash value in a life insurance policy
  • Inheritance
  • Interest in a business
  • Real estate
  • Any income from working into retirement    

Well prior to commencing your retirement it is a good idea to review all of your anticipated assets and determine how they can be best utilized to support your anticipated retirement lifestyle.

Determine how much you will need to support your retirement lifestyle 

While this might seem intuitive you’d be surprised how many folks within a few years of retirement haven’t done this. Basically you will want to put together a budget.  Will you stay in your home or downsize?  What activities will you engage in?  What will your basic living expenses be?  And so on.

Compare this to the income that your various retirement resources might generate for you and you will have a good idea if you will be able to support your desired lifestyle in retirement.  Further you will need to do some planning in terms of which financial resources and accounts to tap at various stages of your retirement.

This is a very cursory “checklist” for Baby Boomers and others within a few years of retirement. This might be a good point to engage the services of a fee-only financial advisor if you’ve never done a financial plan, or if your plan is out of date. Retirement can be a great time of life, but proper planning is required to help ensure your financial success.

Please contact me at 847-506-9827 for a complimentary 30-minute consultation to discuss all of your investing and financial planning questions. Check out our Financial Planning and Investment Advice for Individuals page to learn more about our services.

The Chicago Financial Planner is a participant in the Amazon Services LLC Associates Program, an affiliate advertising program designed to provide a means for sites to earn advertising fees by advertising and linking to Amazon.com. If you click on my Amazon.com links and buy anything, even something other than the product advertised, I earn a small fee, yet you don’t pay any extra. Click on the Amazon banner below to go directly to the main site or check out the financial planning related selections in our Book Store.

 

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How Confident Are You About Retirement?

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Retirement Paradise

The Employee Benefit Research Institute (EBRI) recently published their annual Retirement Confidence Survey.  A few highlights from the survey:

  • The number of workers who say they are confident that they will have enough money to live comfortably in retirement improved to 18% from 13% in the prior survey.
  • The percentage of retirees indicating that they were very confident that they would have enough money to live comfortably in retirement jumped from 18% to 28%.
  • Workers having money in a retirement plan such as an IRA, 401(k), or pension were more than twice as confident that they would have enough money in retirement (24% vs. 9%) than those not participating in a retirement plan of some sort.
  • Worker confidence decreased with higher levels of debt.
  • Worker confidence was higher among workers with higher levels of income. 

Surveys and overall statistics are great, but the reality is that your level of retirement confidence should be driven by your level of retirement readiness.

Retirement readiness questions 

In assessing your level of retirement readiness, ask yourself these questions:

  • How much do I have saved for retirement?
  • How much am I saving each year for retirement?
  • How much will I need to have accumulated by the time I retire to ensure a comfortable retirement?
  • How much will I spend annually in retirement?
  • What resources will I have available to fund retirement other than my nest egg?  This would include items such as a pension and Social Security. 

The impact of debt

According to the survey those workers carrying high debt loads were less confident about their ability to accumulate enough money for a comfortable retirement than those workers with more modest levels of debt.  This is no surprise in that money that goes to service your debts is money that cannot be saved and invested for retirement.

Once you are retired excess debt payments can be a real burden for those on a fixed or semi-fixed income which is a high percentage of retirees.  If the debt, such as a mortgage, is at a manageable level given your retirement cash flow, that’s fine.

What can you do to boost retirement confidence? 

There are any number of things you can do to boost your retirement readiness and your retirement confidence level.  Here are a few:

  • Manage your spending and make cuts where possible.
  • Take full advantage of your 401(k) plan or other workplace retirement plan.
  • Start and fund a self-employed retirement plan if you are self-employed.
  • Manage all of your old retirement plans as well as those of your spouse as part of your overall portfolio.  Consider an IRA to consolidate several old plans in one place.
  • Get a financial plan in place to assess where you stand and to determine any shortfalls regarding where you need to be.  Tools such as the calculator at the end of this post can help as well. 

If it looks like you might come up short relative to being able to fund your desired lifestyle you have some choices to make:

  • Delay retirement or plan to work at least part-time during retirement.
  • Ramp up you savings now.
  • Revise your planned standard of living in retirement. 

In a prior post on this blog Is a $100,000 a Year Retirement Doable? I worked through the math of a hypothetical retiree.  This methodology might be helpful to you as well.

You may or may not like the answer you get when you do the planning and the math for your retirement but at least you will know where you stand.  Knowing where you stand is powerful and can go a long way to improving your confidence about your retirement.

Please contact me at 847-506-9827 for a complimentary 30-minute consultation to discuss  all of your investing and financial planning questions. Check out our Financial Planning and Investment Advice for Individuals page to learn more about our services. 

The Chicago Financial Planner is a participant in the Amazon Services LLC Associates Program, an affiliate advertising program designed to provide a means for sites to earn advertising fees by advertising and linking to Amazon.com. If you click on my Amazon.com links and buy anything, even something other than the product advertised, I earn a small fee, yet you don’t pay any extra. Click on the Amazon banner below to go directly to the main site or check out the selections in our Book Store.

 

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Retirement: Will You Outlive Your Money?

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If you’ve been watching the Olympics, you may have noticed several new Ameriprise Financial commercials with their star pitchman Tommy Lee Jones.  One commercial asks the question on the mind of many folks looking to retire:  

retirement

This isn’t about whether Ameriprise Financial is the right firm to help you answer this vital question.  Rather I wanted to discuss some of the factors that will go into the answering this question from the perspective of someone looking to retire.

Your resources 

A good first step is to determine your resources to generate spendable cash once you retire.  Depending upon your situation these may include some or all of the following:

  • 401(k) or similar retirement plan such as a 401(b) or other defined contribution plan.
  • IRA accounts, both traditional and Roth.
  • A pension.
  • Stock options or restricted stock units.
  • Social Security
  • Taxable investment accounts.
  • Cash, savings accounts, CDs, etc.
  • Annuities
  • Cash value in a life insurance policy
  • Inheritance
  • Interest in a business
  • Real estate
  • Any income from working into retirement  

The list above is not exhaustive and you may have other assets or sources of income that you will be able to tap in retirement.

How much have you accumulated? 

This is an important question at all ages for those saving for retirement.  It is critical the closer you are to retirement and this is certainly true if you are within 10 years or less of retirement.

How much will you spend in retirement? 

While this might vary over the course of your retirement you need to take a stab at a spending plan for retirement if you are close to retirement.  Some of the issues to consider:

  • Where will you live?
  • Will you have a mortgage or other debts as you enter retirement?
  • What types of activities will you engage in?
  • What are your costs for medical insurance and medical care?
  • Will you need to provide support for children?  Grandchildren?  Aging parents?
  • What will your basic living expenses entail?  

These questions just scratch the surface, but I think you get the idea.  One other point to remember is that you might spend more on travel and activities in the earlier part of your retirement and less as you age.  However, any savings here might be offset by increased costs for medical care.

Another approach is to figure out what level of expenditure your savings and other resources will support and either work backwards to a budget within that spending level, try to ramp up your retirement savings to close the gap, or perhaps plan to work a few years longer before retiring.  This can be done using the retirement calculator tool below or any number of retirement planning calculators available online.  With any such tool it is important that you pay attention to the assumptions inherent in the calculator’s model and that you think through any assumptions that you are allowed to input.

A qualified financial planner can help you through this process and this is a key element in a financial plan.

Whatever route you take the issue of outliving your money in retirement is a vital one for you to address.  In my opinion this is the biggest risk retiree’s face and is a biggest risk than losing money in the next market downturn.

Please check out our Book Store for books on financial planning and retirement as well as any Amazon shopping needs you may have.  The Chicago Financial Planner is a participant in the Amazon Services LLC Associates Program, an affiliate advertising program designed to provide a means for sites to earn advertising fees by advertising and linking to Amazon.com.  If you click on my Amazon.com links and buy anything, even something other than the product advertised, I earn a small fee, yet you don’t pay any extra.

Please contact me at 847-506-9827 for a complimentary 30-minute consultation to discuss  all of your investing and financial planning questions. Check out our Financial Planning and Investment Advice for Individuals page to learn more about our services.

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Reverse Mortgages – The Basics

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Senator Thompson in Iowa.

 This is a guest post by Gary Foreman, of The Dollar Stretcher.com one of the oldest and best all-purpose financial blogs.  I don’t know about you but I find those reverse mortgage commercials featuring Fred Thompson to be nauseating and annoying.  Gary provides some objective information for those who might be considering this route.

With approximately 10,000 Baby Boomers reaching retirement age every day, it’s not surprising that more people are asking questions about reverse mortgages.  The concept of a reverse mortgage seems complicated at first. But if you break it down into it’s individual pieces it’s not that hard to understand.

Comparing a reverse mortgage to a traditional mortgage

With a traditional mortgage the lending institution gives you a large sum of money at closing that you use to buy the house from the seller. Generally you’ll make monthly payments to the lender to repay the loan. Hopefully someday you’ll have the mortgage paid off and own the house free and clear.

With a reverse mortgage you’re borrowing against the value of your home. Just like a traditional mortgage. Naturally you need to own your home outright or have significant equity.

Most reverse mortgage borrowers choose to take a monthly check from the lender although there are other options. So instead of repaying the mortgage, each month the amount they owe increases.

Beyond the basics

There are a number of requirements to qualify for a reverse mortgage.

  • The borrower must be 62 or older.
  • The home must be your principal residence.
  • Your home must meet all FHA property standards.

Besides these requirements, there are a few other facts about reverse mortgages that you’ll want to know.

  • How much money you can borrow will depend on your age, the equity in your home and the current interest rate.
  • The interest charged on the loan is variable, not fixed.
  • The lender will charge you an origination fee that will be included in the amount that you owe.
  • After you move from your home, the loan becomes due.
  • Any equity left after the loan is repaid goes to you or to your heirs.
  • The money you receive is a loan and generally not considered as ‘income’ for tax or Social Security purposes.

Advantages and disadvantages of a reverse mortgage

First, the positives.

You have flexibility in how much and how often you receive money. You can choose a fixed monthly payment, a line of credit, a lump sum or a combination.

You will never owe more than your home is worth. So when you finally move out and sell the home you won’t need to bring money to the closing table.

You still own the home. The title stays in your name(s), just like with a traditional mortgage.

You don’t repay the loan until the last surviving borrower dies, sells the home or moves out. If you need to move into a nursing home, you’ll have 12 months before the loan becomes due.

The income shouldn’t affect your current Social Security or Medicare benefits, though you should consult with the Social Security folks or your financial advisor.

Unlike other mortgages there aren’t any income requirements.

But, there are some negatives to consider before you apply for a reverse mortgage.

You’ll be charged origination fees and closing costs. There can also be ‘servicing fees’ during the life of the loan. They’ll be included in the amount you’ll owe when you pay off the mortgage. Often these fees are quite high.

Income from the reverse mortgage may affect your eligibility for Medicaid. Contact a CPA or Medicaid planner for details.

The amount you owe will steadily increase over time, even if you choose a single lump-sum payout.

Most reverse mortgages have variable interest rates. So the amount you owe could increase significantly if inflation returns and interest rates rise from our current low rates.

Unlike traditional mortgages, you generally can’t deduct interest paid on your federal income taxes until you sell the home.  I suggest consulting your tax advisor here.

Unless you’re prepared to repay the mortgage from home sale proceeds, you’ll be trapped in your home. No moving to a retirement community or condo.

You won’t be able to give or sell your home to a child without repaying the mortgage.

You’ll still need to pay insurance and taxes on your home. The typical responsibilities of a homeowner remain.

A few final cautions

You should also consider alternatives to a reverse mortgage. There may be other sources of income that are a better fit for your needs. This is especially true if you don’t require an additional regular monthly income stream.

Before you take out a reverse mortgage on your home make sure that you understand it thoroughly. There are some aspects that are a little unusual. Take your time. Don’t be rushed into a decision.

Remember, too, that people will be making money on your mortgage. And, sometimes unscrupulous people push financial products that aren’t well suited to the situation. So tread cautiously.

But, in the right situation, a reverse mortgage can be a viable solution for Baby Boomers and seniors looking for some extra retirement income.

For additional facts regarding reverse mortgages visit the HUD website.

Gary Foreman is a former financial planner who founded  The Dollar Stretcher.com website and newsletters.  The site features thousands of articles on how to save your valuable time and money including other articles on reverse mortgages.

Please contact me at 847-506-9827 for a complimentary 30-minute retirement planning consultation and to discuss all of your investing and financial planning questions. Check out our Financial Planning and Investment Advice for Individuals page to learn more about our services.   

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Is My Pension Safe?

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Logo of the United States Pension Benefit Guar...

The city of Detroit recently filed the largest municipal bankruptcy in history.  One of the potential casualties of this situation will likely be retired city workers receiving pensions.  While pension payments are promises made by the employer, should the bankruptcy go through the city will be free to cut pension benefits as part of the restructuring of the city’s finances.  In light of this situation, how safe is your pension?

What is behind your pension? 

Your employer starts an investment fund that is designed to grow via investment returns and contributions from the employer to a level that will support the pension benefits you’ve earned based upon the plan’s benefits formula.  Pension benefits are typically earned by workers based on a formula that usually takes into account factors such as career earnings, years of service and perhaps other factors.  Each year an actuary calculates the amount that the employer must contribute to the pension plan in order to maintain an acceptable level of funding.

Sadly in far too many cases, especially in the public sector, we’ve seen employers under contribute to their pension plan causing severe underfunding.  In my home state of Illinois this is rampant and is a major part of our state’s ongoing pension crisis.  Certainly this was also a factor in Detroit’s case as well.

Let’s take a look at some of the issues with private employer pensions and those in the public sector.

Private employer pensions 

Pension plans offered by private employers (which I define as those employers who are not municipalities, state or federal government entities, etc.) are a liability of the company in much the same fashion are their accounts payable or a bank loan.  Failure to make good on these obligations can result in the bankruptcy of the firm.

Should a private employer be unable to make good on its pension obligation, in most cases the Pension Benefit Guarantee Corporation (PBGC), an independent governmental agency, will step and cover the pension obligations of the company up to its limits.  The maximum benefit they will guarantee depends upon the year in which the plan was terminated and your age among other factors.

For many workers the PBGC maximums will cover the pension payments promised via their employer’s plan.  Some highly paid retirees receiving large monthly pension payments might see their payments reduced once PBGC coverage kicks in.  A case in point occurred here in Chicago in 2005 when locally based United Airlines defaulted on its pension obligations and many retired pilots and other highly paid retirees saw their monthly benefits reduced by the PBGC.

Municipal and governmental pensions 

The issue for the retired Detroit workers is that municipal and governmental pensions have no backstop such as the PBGC.  Detroit will be the biggest test of the Chapter 9 municipal bankruptcy process but there is much speculation that current and future retirees will see cut on the order of 30%-40% or more in their monthly payments.

At the state level it is less clear to what extent that states such as Illinois would be able to reduce pension payments due the rules in place.

Steps to consider

If you are retired and drawing a pension there probably isn’t much that you can do.  One step to consider is taking your Social Security now if you are eligible and have been waiting to draw upon it until a later age to maximize your benefit.   You might also look at getting a part-time job or hanging out your shingle as a self-employed consultant if you have skills that are applicable to this route.

If you are approaching retirement and your pension plan offers the option to take a lump-sum benefit as an alternative to annuitizing this option might be even more attractive now.  As always you should look at all of the factors involved such as the financial stability of your employer, your other resources available in retirement, etc.  This might be a good time to engage the services of a fee-only financial planner who can help you evaluate your options.  While a lump-sum still needs to be managed in terms of the investments chosen and the timing of withdrawals, you do eliminate any issues surrounding future benefit reductions due to your employer encountering financial difficulties.  If you are offered an early retirement package you should give it serious consideration as well.

Younger workers should take this as a wake-up call and make sure they are saving for retirement especially if they are counting on a pension plan from their employer.  Many companies freeze their pension benefit which means that you will receive the benefit that you’ve earned but you won’t be accruing a larger benefit via increased earnings and years of service.  Take full advantage of defined contribution retirement plans such as a 401(k) or a 403(b).  Fund an IRA account.  Save and invest in taxable accounts.  Strive for financial independence as soon as possible.

Retirement calculator

Check out the retirement calculator tool below for a look at your situation. While this is an excellent tool, please remember the results only provide a first step in the retirement planning process.  This is not a substitute for an in-depth financial plan done by a qualified professional.

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Employees with a pension plan generally have a leg up in retirement.  The Detroit situation simply highlights the fact that nothing is set in stone.  At the end of the day we are all responsible for our own retirement, plan accordingly to the extent that you can.

For more background on this situation check out these two excellent pieces on the Market Watch site:

Detroit not alone; public pensions vulnerable

Will your pension disappear, post-Detroit?

Please contact me at 847-506-9827 for a complimentary 30-minute retirement planning consultation and to discuss all of your investing and financial planning questions. Check out our Financial Planning and Investment Advice for Individuals page to learn more about our services.   

Please check out our Resources page for some additional links that might be beneficial to you.  

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A Bucket Approach to Retirement

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I had the privilege of participating in a panel discussion entitled Practical Solutions for a Challenging Retirement Landscape at the recent Morningstar Investment Conference.  The panel was moderated by Morningstar’s Christine Benz, one of my favorite personal finance journalists.  After our session Christine and I discussed the bucket approach to retirement, a topic about which Christine has written extensively.

Here is a video of this conversation which as I write this appears on the Morningstar site.

 

Here is a link to the interview as well.

My thanks to Christine and to Morningstar for the opportunity to be a part of their excellent conference, this is always an outstanding event.

Please feel free to contact me with your retirement and financial planning questions.  Check out our Financial Planning and Investment Advice for Individuals page for more information about our services.   

Please check out our Resources page for links to some additional tools and services that might be beneficial to you.

 

 

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What Lifestyle Changes Will You Make in Retirement?

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This is a guest post by Miranda Marquit, a financial journalist and freelance writer. She contributes to several financial web sites, and her work has appeared in numerous media, online and offline. Miranda’s blog is Planting Money Seeds.

When many of us think of retirement, we focus on the nest egg. Have you saved up enough? How much needs to be set aside each month in order to reach your financial goal?

Unfortunately, too few of us consider what to do with all of that money during retirement. You know you probably need a good-sized nest egg to retire comfortably, but have you considered how you will use that money to your best advantage? Your lifestyle will change during retirement, and you need to be prepared – and know how you will spend your time, as well as your money.

Are You Emotionally and Physically Ready to Retire?

While you do want to make sure that you know how much money you need to retire, you also don’t want to neglect your lifestyle. In theory, it’s nice to say that you’ll quit working and that you’ll relax, but the reality is that many retirees don’t know what to do with themselves after they retire.

Indeed, a study in the United Kingdom indicates that mental and physical health can suffer after retirement. Without the physical activity that comes with work, and without the social interaction, many retirees become depressed and lose some of their physical abilities. If you don’t have a plan to replace various aspects of your job, the deterioration could be rapid.

Your main lifestyle change will be switching from work to trying to find something else to do. Some of the ways you can replace the social and physical aspects of your job during retirement include:

  • Work on a hobby.
  • Join a seniors group or frequent the senior center.
  • Become involved with a civic organization.
  • Travel and make friends.
  • Volunteer.
  • Learn a new skill or go back to school.
  • Become a consultant.

These activities can provide you with purpose, as well as help you feel as though you are accomplishing something worthwhile. Some retirees even decide to work a part-time job, just to remain involved with life. It can be especially invigorating to get a part-time job in a field that you might not have worked before. In these cases, it’s not about the money – your retirement savings might be more than sufficient. Instead, it’s about quality of life, and enjoying your lifestyle.

Do You Need to Downsize?

What happens if you know you are ready to retire, but haven’t quite hit your retirement savings goal? If this is the case, you need to decide whether you want to tough it out at work, or whether you want to retire now and make some lifestyle changes.

One of the ways that many retirees change their situation is through downsizing. Even retirees who have a large nest egg might be interested in downsizing. Sell your home and use the proceeds to purchase a smaller home, or pay for housing in a senior community.

You can also sell some of your possessions to reduce the clutter in your life and even raise a little extra cash. This can be a good way to retrench so that your retirement lifestyle is affordable on whatever nest egg you have. And, if you plan to travel extensively, you’ll want to downsize so that you don’t have as much stuff to worry about while you enjoy your newfound freedom.

Bottom Line 

What you will do, and how you will remain engaged are important aspects of retirement. Unfortunately, too few of us think about the lifestyle implications of retirement. Think about the changes that retirement will bring to your routine, and how you might feel with the lack of social interaction that often comes with a traditional job. Then, figure out how you can arrange matters so that you truly enjoy your retirement.

Miranda is a financial journalist and freelance writer. She contributes to several financial web sites, and her work has appeared in numerous media, online and offline. Her blog is Planting Money Seeds.

Please feel free to contact me with your retirement and financial planning questions.  Check out our Financial Planning and Investment Advice for Individuals page for more information about our services.   

Please check out our Resources page for links to some additional tools and services that might be beneficial to you.

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Are Retirement Rules of Thumb Useful?

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Ladies in Retirement

I had the privilege of participating in a panel discussion about retirement planning challenges at the recent Morningstar Investment Conference.  Morningstar’s outstanding columnist Christine Benz did a great job of moderating the discussion which also included Christine Fahlund of T.Rowe Price and Maria Bruno from Vanguard.

One of the topics of discussion was the value of retirement rules of thumb, in particular the 4% rule surrounding sustainable retirement withdrawal rates and the 75% rule that address the percentage of one’s working income that they may need to replace in retirement.

The 4% Rule 

This rule, developed by my NAPFA colleague Bill Bengen, says that a 4% withdrawal rate from your retirement nest egg should be sustainable over a 30 year retirement period.

There was wide agreement among everyone on the panel that 4% was a reasonable starting point, but it was just that a starting point.  Every client situation is different and the level of withdrawals from tax-deferred accounts, Roth accounts, taxable investments and other assets needs to be looked at and managed for each individual retiree on an ongoing basis.  Factors such as the performance of their investments need to be taken into account.  As I mentioned during the session I discuss upcoming cash needs with each retired client on a regular basis as well.

In a recent post on this blog Is a $100,000 a Year Retirement Doable? I discussed how I use the 4% rule as an estimating tool in discussions with a client or prospective client.  Essentially we start with their desired gross cash need in retirement.

Next we look at their total savings for retirement and apply the 4% rule.  For example this would indicate that a $40,000 annual withdrawal from a $1 million nest egg might be sustainable.  We then look at other resources such as Social Security and a pension to determine if the client can reasonably expect to meet their desired retirement cash flow.

The 4% rule is a useful estimating tool in the context of this type of discussion, but it is just a starting point.  At this point in the real work begins.  This includes a spending plan, an allocation or the client’s investments, and most importantly ongoing monitoring of their situation to determine if adjustments are needed.

The 75% Rule   

One of the audience members, a financial advisor, asked me if I had seen any of my clients who are spending less than the 75% of their pre-retirement income in retirement.  This percentage is often cited as a benchmark to estimate one’s cash flow needs in retirement.  This advisor had indicated that this has been his experience with many of his clients.

My response was that I have had this experience with some clients as well.  On the other hand some spend more especially in the early years of their retirement.  As with any rule of thumb, one size does not fit all here.

Everyone’s retirement is different.  With many of us in excellent health in retirement initial retirement spending may even exceed 100% or our pre-retirement income.  This might include travel, the purchase of recreational toys, hobbies, etc.

Later in retirement our activities might slow down resulting in lower spending.  The wild card from a planning standpoint is health and long-term care expenses.  This is both from an actual health standpoint and from issues like the unknown impact of Obama Care.

Rules of thumb can be useful tools to make retirement planning estimates but they are no substitute for detailed financial planning.

Please feel free to contact me with your retirement and financial planning questions.  Check out our Financial Planning and Investment Advice for Individuals page to learn more about our services.   

Please check out our Resources page for links to some additional tools and services that might be beneficial to you.  

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