Over the years, we’ve noticed that our clients here in Kosciusko County have done a pretty good job of preparing for retirement. Increasingly, though, we are seeing more people who are delaying their planning because the view it as too complicated, or are simply overwhelmed by the number of choices that exist for your retirement. It doesn’t need to be that complicated, and you can break it down into two broad categories that you can plan for. The first is what you will need later, and the second is what you need to do now.
What you will need later is a date for your retirement, an amount of money to supplement your income, how long you will need the money, and what sources of guaranteed money you have available to you. Your retirement date is usually pretty easy to come up with. Many people just say they want to retire as soon as possible! However, you need to be realistic about your date. For young people, this can be a vague idea but as you get older, it needs to become more precise. How much money you’ll need is usually based on what you earn while you’re working. Many financial planners will say you need 70 to 80% of your preretirement income, but we believe that number should be closer to 90 or 100%, especially in the early, more active years.
How long you will need the money to last depends on what your age is at retirement and how long you live. For most people retiring at 65, it makes sense to plan for at least 25 years, but if you have a family history of great longevity, you might want to plan for even longer. Of course, medical and genetic advancements may also make it necessary to plan for longer life expectancy. Guaranteed sources of retirement income are things like Social Security, pensions and annuity payments. These usually are designed to last for your entire lifetime.
You will put all of this information together to figure how much you’ll need to save. You will take that yearly income figure and subtract the guaranteed income. This will tell you how much you’ll need to generate from savings and investments. So if you figure you’ll need $50,000 a year to live on, and your guaranteed income is $20,000, you’ll need $30,000 from your savings. In order to generate $30,000 in income, you’ll need around $750,000 based on a 4% withdrawal rate.
What you need to do now is come up with a customized financial plan, including a plan to free yourself from debt. Once you have that in place, you can determine if you can save as much as you’ll need to in order to meet your goals. If not, you can come up with a strategy to increase your savings. A big part of this process is creating an investment plan. Your investment plan will include what level of returns you believe you’ll be able to generate. It is very important to be realistic here. Many equity investors assume that they will be able to earn 10% or even more. While that may be possible, it is better to start with an asset allocation plan which will help you to divide your nest egg among stocks, bonds, and cash equivalents. As you get older and closer to retirement, you will generally reduce the volatility of the portfolio be reducing the stock holdings. Typically it is better to err on the side of too conservative an assumed rate of return that too aggressive. Too conservative may potentially get you a larger than necessary nest egg, which is a much better problem to have than too small a portfolio. Remember, the investment plan should come out of the financial plan.
I know this is a common theme in this column, but retirement and financial planning does not need to be complicated to make a difference in your life. Spending a little time each year will make things much smoother in the future.
To hear the podcast of the Smart Money Management radio show on this topic, or others, go to our website at alderferbergen.com.
Fixed and Variable annuities are suitable for long-term investing, such as retirement investing. Gains from tax-deferred investments are taxable as ordinary income upon withdrawal. Withdrawals made prior to age 59 ½ are subject to a 10% IRS penalty tax and surrender charges may apply. Variable annuities are subject to market risk and may lose value.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
investing involves risk including loss of principal.
Examples are hypothetical and not representative of any specific investment. Your results may vary
Guarantees of annuity payments are based on the claims paying ability of the issuing company.
Asset allocation does not ensure a profit of protect against loss.
Securities and Advisory services offered through LPL Financial, a registered investment advisor. Member FINRA/SIPC.