Will I Outlive My Retirement Savings?
Determining how much money you need in retirement is a complex process. It shouldn't be a number we try to guess or even “back into” without some advanced financial planning help.
The process for every individual or couple is akin to a jigsaw puzzle and everyone’s pieces fit together differently. Let’s take a look at some key obstacles that many will have to contend with.
Planners will often ask clients about what an “ideal retirement” might look like. Some clients want to buy a second property, some want to see the world, some want to spend time with family and friends and others just want to read great books. Even if our futures unfold in ways we do not predict, making a plan is a great way to see what goals are attainable and what steps should be taken to avoid running out of money or to retire in style. Initially, a financial planner will want to review your current financial situation and will start to develop an approach based on your goals, time horizon, and risk tolerance. The process should take into consideration all your potential sources of retirement income and may project what your income would look like each year in retirement.
Retirement Income
Income in retirement can be generated in many different ways. Social security is one source top of mind for most to include in their retirement calculation. For some, pensions still exist, constituting a substantial share of retirement funds. Additionally, certain annuities serve as private pensions, enhancing monthly income streams. Clients may own an investment property where they collect monthly rent from tenants that help to supplement their retirement, while others decide to work part-time as a way to pay for luxuries or to meet regular monthly expenses. Each of these forms of income align with strategies or potential opportunities that can empower clients to manage their retirement effectively. Some may opt to delay taking Social Security benefits and according to the Social Security Administration’s website, ssa.gov, benefits rise about 8% for every year you delay receiving them. Filing for your monthly benefits before you reach Social Security's Full Retirement Age (FRA) can mean comparatively smaller monthly payments. Clients will also rely at least somewhat on income generated from their portfolios to either pay essential expenses or even splurge on some luxuries.
Lifespan & Health-span
As you hear in the sporting world from time to time, “Father time is undefeated” and the reality is that we are all getting older every day. Longevity or Lifespan is often looked at as a “risk”. Financial advisors don’t want clients to outlive their assets. This is why many financial planners will use age 95 or 100 as part of a financial plan, as a way of planning away most of the risk, although realistically, most people won’t live to 100. Actuaries at the Social Security Administration project that around a third of today's 65-year-olds will live to age 90, with about one in seven living 95 years or longer. The prospect of a 20- or 30-year retirement is not unreasonable, yet there is still a lingering cultural assumption that our retirements might duplicate the relatively brief ones of our parents.
Healthcare is also a cost that just seems to be rapidly accelerating. For those aspiring to retire early, healthcare coverage can act as a financial drag until Medicare kicks in. Self-funding healthcare costs can be significant and need to be planned for whether or not you plan to retire before age 65.
Health-span is a related but somewhat different topic. The healthier a client is, the more likely they will spend more on things like vacations or other forms of recreation. If someone is struggling with health, more of those retirement funds will be earmarked for medical care in one form or another. That said, Medicare will not pay for everything. Unless there's a change in how the program works, there are a number of out-of-pocket costs, including dental and vision care. Different health scenarios can be added or changed in a plan to account for changes in spending patterns associated with health.
Withdrawal Strategies
You may have heard of the "4% rule," a guideline stating that you should take out only about 4% of your retirement savings annually. To illustrate, 4% of a $2 Million portfolio would mean $80,000 worth of withdrawals. There is some mathematical reasoning behind this. While no one can predict what will happen in the according to Vanguard and others, the stock or bond markets, moderately invested, well diversified portfolios have returned in the 7% - 8% range historically speaking. This allows for a client to spend 4% and reinvest 3% - 4% to keep up with inflation, essentially, allowing for a raise on how much a client distributes in real dollar terms as cost of living increases over time. In the first phase of retirement, people tend to spend more. More free time can promote new adventures and an inclination to spend more freely. Other strategies include living on dividend income, which could be income generated by stock dividends and income thrown off by fixed instruments like bonds. Investors are generally attempting to keep their principal intact with this strategy.
Taxes
Taxes are the most significant “fee” that any of us will ever pay. Implementing a strategy to help minimize taxes and thereby maximizing the amount of your investments that you are able to keep is a critical part of being a successful investor. Using municipal bonds, having a plan with regard to asset location, managing short- and long-term capital gains and taking advantage of tax loss harvesting should be part of any investor’s strategy. Not having a plan will be a drag on returns and for some retirees could limit their ability to accomplish all that they would like to in retirement or could put a damper on leaving a meaningful legacy.
Retiring with Debts
Having debt going into retirement, depending on the level of debt can put financial plans in jeopardy. Some find it harder to preserve (or accumulate) wealth when you are handing portions of it to creditors. This could be credit card companies, the company that holds your mortgage or even a loan servicer for student debt. The elimination of debt is always going to be high on a financial planner’s priority list and as you near retirement, it should be on yours as well. If you are carrying a mortgage payment for a couple of years into retirement or are using it strategically because of the low rate, it can be budgeted for. If you find that you continuously are running up the credit cards because of out of control spending or your emergency fund is not able to cover some large unexpected costs, it is worth a closer look. Student loan debt for ourselves or our family members can throw a wrench in retirement and have become of greater concern in recent years due to skyrocketing college costs.
Retiring with a Subpar Investment Strategy
Expect that retirement will have a few surprises; the absence of a strong investment strategy can leave you without guidance when those surprises happen.
Without adequate diversification or liquidity, you may be forced to sell investments at unfavorable times or incur penalties to access funds. Financial uncertainty during retirement can cause significant emotional stress and anxiety, impacting your overall well-being and quality of life. A subpar investment strategy may subject your portfolio to unnecessary risk without commensurate returns, leading to significant losses during market downturns.
Giving thoughtful consideration to factors such as retirement income, lifespan and health-span, withdrawal strategies, taxes, retiring with debt, and a financial plan is crucial in retirement planning to ensure a secure and fulfilling post-work life tailored to individual needs and circumstances.
These considerations are essential as they collectively shape the financial security, longevity, and overall quality of life during the retirement years.To have a complete picture of what retirement may look like for you, take some time to review and refine your financial/retirement plan with the help of a trusted financial professional.
This article is for educational purposes only and is not intended to be specific tax, legal, or investment advice. The information contained has been compiled from sources deemed reliable, yet accuracy is not guaranteed. Additional information, including management fees and expenses, is provided on our Form ADV Part 2 available upon request or at the SEC’s Investment Adviser Public Disclosure website. Past performance is not a guarantee of future results.