According to the Social Security Administration, average life expectancies for current retirees are now 86.5 for women and 84 for men. While this means people can expect to enjoy more than 20 years in retirement, it also means that their retirement savings must sustain them for decades. But for many, the idea of living off one’s savings is terrifying and leads to fear of outliving their assets.
In its 2019 “Retirement Planning Survey,” Financial Advisor Magazine reported that 45% of advisors said outliving assets is one of the biggest threats that their clients face in retirement. Another 2019 study from Employee Benefit Research Institute found that only 42% of Americans have attempted to figure out how much money they should be saving for retirement. There are a variety of calculators available from many reputable institutions that could help you, including this one from Schwab.
Unfortunately, there is no “magic number” for how much you need to guarantee security in retirement. The goal is to maintain your standard of living and enjoy peace of mind. A financial advisor can help you define your goals and objectives and provide opportunities to mitigate risks while meeting your needs through every phase of retirement.
Planning Before Retirement
Pre-retirement is the “accumulation” phase. Your focus should be building your savings. In the years prior to retiring, a financial advisor can help you define your financial picture. This includes your current level of assets, types of assets, current cash flow needs, and your goals and dreams for retirement. Be detailed when identifying your retirement goals. Do you plan to travel? For how long and what type of travel? What will your travel cost? Will you remain in your current home? What will it cost to maintain the property (if you are travelling or no longer able to do so personally)? If not, where do you intend to live and what will it cost? Do you desire making charitable gifts or specific bequests during retirement (or at death)? With a clear, detailed picture of your current financial situation, a financial advisor can determine if you are on track to meet your goals. And, if not, will work with you to develop a plan for necessary adjustments. They can identify opportunities to increase retirement savings and/or adjust expectations to meet your long-term needs.
It is essential to regularly review your financial picture with your advisor. You will need to consider the impact of market volatility, changes in savings rate, changes in savings type (i.e. IRA versus Roth IRA versus taxable savings), when to reduce your employment or retire completely, when to begin social security benefits, and much more.
It is also important to consider the non-financial aspects of retirement. What does it feel like to be retired? What does retirement look like? How will you spend your days? If you are married, will you both retire simultaneously? Do you have the same goals and dreams for retirement? If not, in what areas are you willing to compromise? If you are not sure how to address these topics independently, financial advisors can frequently be a helpful resource here.
When you are nearing retirement, it is time to fine-tune your retirement cash flow needs. You will need to make decisions about health insurance and which Medicare plan best meets your needs (i.e. Medicare, Medicare Supplement insurance, Medicare Advantage). It is important to determine when you will begin your social security benefits. If you are lucky enough to have a pension benefit, what benefit election is most appropriate for you? And, what monthly cash flow can you expect from your portfolio? What are the tax implications of your cash flow? For example, Roth IRA distributions are (typically) not taxed, while IRA distributions are taxed at ordinary income tax rates, and capital gains are taxed at capital gains tax rates. With the help of an advisor, your needs can be met while still minimizing your long-term tax burden.
At retirement, you shift from accumulating assets to spending them. Many find this shift difficult. Most of your life has focused on saving and accruing assets, and now you are supposed to spend those hard-saved assets. Surveys have found that many retirees continue to save in retirement – a Vanguard study found that retired households with at least $100,000 in assets save 31% of their income on average.
This phase is also a good time to review your estate planning documents. Have your wishes changed? Are you prepared for long-term illness or premature death? Are your heirs protected from legal liabilities and/or special needs? A financial advisor can help determine your needs and locate resources to develop an appropriate plan. You may need/want to consider strategic gifting or to establish a trust to meet your needs. While it can be uncomfortable to spend down your assets and review estate planning documents, it is important to remember that these are the reasons you accumulated assets in the first place.
Retirees often struggle with how much they can spend in retirement. For much of your life, you “spend” based on the amount of your earned income. In retirement, you “spend” based on your savings and level of comfort. This transition can be challenging to psychologically adjust to.
Retirement income planning is an art as well as a science. A financial advisor can help guide you past general “rules” and plan to your specific situation. There is a benchmark which states withdrawing 4% per year from retirement savings can minimize your chances of outliving your assets. But this simple rule ignores some important factors – over time, inflation can erode the purchasing power of money and force retirees to withdraw increasing amounts of money to maintain the same standard quality of life. Income needs will fluctuate as inevitable life changes and unplanned expenses occur, and market volatility means that any assets invested in stocks or bonds will fluctuate with the markets.
So, while 4% may be a good general benchmark, it should remain as just that: a starting point. It is important to develop a cash flow that works for you. You will want to review your portfolio and spending at least annually to determine if any adjustments are appropriate.
It is not easy to save for 20 or more years of spending following retirement. As a result, planning for retirement is an ongoing, life-long process. A financial advisor can help you develop a plan that aligns with your unique situation, and together you can take steps to assure your plan lasts as long as you do.