Six Steps to Retirement Preparation
Your Ideal Retirement
Your retirement will probably look much different than your parent’s retirement. You can rest assured that retirement today is very different than it was for past generations... That’s not necessarily a bad thing either. Chances are your vision of an ideal retirement lifestyle varies significantly from your parents, creating a greater need to prepare well. So, what would your “Ideal Retirement” look like?
It’s always fun to daydream about what your adventure might be, right? When you no longer have to work, what will you do to fill your days? Will you move to a coastal community and stroll the beach? Perhaps you prefer to move to another country? After you finish your daydream the reality of planning for a financially secure and healthy retirement sets in. How will this impact your planning?
All of the factors that drive your retirement should be identified and carefully considered to ensure your chance of enjoying the retirement lifestyle of your dreams.
“American workers and retirees are expressing higher confidence about their ability to afford retirement this year, even though there is little sign they are taking the necessary steps to achieve that goal.”
Source: Employee Benefit Research Institute and Greenwald & Associates, 2015 Retirement Confidence Survey
Statements We Often Hear - How Sure Are You?
“My expenses will be lower in retirement.”
“I will continue to work during retirement.”
“I need to claim my Social Security benefits as soon as I can.”
“My spending patterns won’t change much when I retire.”
Do you really know what your expenses will be during your retirement? What should you include and how much? How about your income... What do you think that will be during retirement? Or better yet, do you know how much income will you really need? What are the sources of your income going to be? Will your savings and other sources be adequate to generate the amount of income you will need or will you need to continue working? When are you planning on retiring? What is your life expectancy? No wonder you have put this off until now...
That is a lot to consider. I will address each of these questions below.
My goal is to help you establish a reasonable plan for your “Ideal Retirement”. After all, peace of mind during retirement is going to be included in just about everyone’s Ideal Retirement, whether they write it down or not. There’s no better feeling as you transition into retirement than being confident that you are well prepared for whatever comes your way.
Let’s get started...
1. Estimate Your Retirement Income Needs
You know how important it is to plan for your retirement, right? So, where do you plan to begin? Since it all comes down to having adequate income to live comfortably, your first step should be to estimate how much income you'll need to fund your retirement. Unfortunately, that's not as easy as it sounds, which is probably why you have put it off... until now. After all, retirement planning is not an exact science and it can get confusing. Your retirement income needs will depend on your lifestyle and many other factors that can and probably will change over time.
But we have to start somewhere and using your current income is as good a place to start as you can get. It's common to discuss desired annual retirement income as a percentage of your current income. Depending on who you're talking to, that percentage varies greatly. This is a fairly simplistic approach which can work well for some families. It is based upon the assumption that you will maintain your current lifestyle in retirement. Using your current income as a starting point and reducing it by an estimated percentage to take into account the assumption that some of your expenses will no longer be incurred and some will change significantly, such as health insurance, payroll taxes, transportation expenses can make sense.
As you might imagine, the risk in using this general approach is that it doesn't account for your specific situation. For example, what if you intend to travel more in retirement, you may find that you could easily spend more than you do currently. If you intend to maintain a lifestyle that is very consistent with your current lifestyle it is fine to use a percentage of your current income as a benchmark, but if you anticipate changes in your lifestyle it is highly recommended that you take the time to go through all of your current expenses in detail and make reasonable changes to reflect how you expect those expenses will change over time as you enjoy your retirement.
Your goal should be to ensure that your income during retirement should be adequate to cover your expenses. After all, that's why estimating those expenses is a big piece of the retirement planning puzzle. As you get started, approach this exercise as a work in progress since you may find it difficult to determine which expenses to include and to project how much you'll be spending in each area, especially if your retirement is five or more years from now.
You should expect the cost of living will go up over time as the average annual rate of inflation over the past 20 years has been approximately 2.2 percent. (Source: Consumer price index (CPI-U) data published by the U.S. Department of Labor, January 2016) Please keep in mind that your retirement expenses may change from year to year. For example, you may pay off your home mortgage or your children's education early in retirement. Other expenses, such as your out of pocket health care expenses and insurance coverage, may increase even with Medicare coverage. The only way to protect against shortchanging yourself against unforeseen expenses is to include a comfortable cushion into your estimates. A good way to build confidence in your projection is to have a financial professional review your estimates to make sure they're as accurate and realistic as possible. After all, a well-trained professional has helped numerous individuals and families plan for their comfortable retirement.
In the following section, we will look at some of the many expenses you might incur during retirement. Please remember this list may not be an exact fit for your retirement as it may include expenses you will not incur or in some cases, it may not necessarily be a complete list. In preparation, you should review your current expense categories and take into consideration categories you may need to include.
2. Project Your Retirement Expenses
To help you get started, here are some common retirement expenses:
- Housing: Rent or mortgage payments, property taxes, homeowners insurance, property maintenance and repairs, association fees
- Utilities: Gas, electric, water, trash removal, telephone, cell service, internet, video and audio content
- Transportation: Car payments, auto insurance, ad-valorem taxes, gas, maintenance and repairs, public transportation
- Food and clothing
- Insurance: Medical, dental, life, disability, long-term care, personal liability
- Health-care costs not covered by insurance: Deductibles, co-payments, prescription drugs, nutritional supplements
- Taxes: Federal and state income tax, capital gains tax
- Debts: Personal loans, business loans, credit card payments
- Education: Children's or grandchildren's college expenses
- Gifts: Charitable and personal
- Savings and investments: Contributions to IRAs and other investment accounts
- Sports and Recreation: Travel, dining out, hobbies, leisure activities
- Care for yourself, your parents, or others: Costs for a nursing home, home health aide, or other type of assisted living
- Miscellaneous: Personal clothing and grooming, pets, club memberships
3. Decide When You Will Retire
To determine your retirement needs you also need to estimate how long you'll be retired. Why? Quite simply, the longer your retirement, the longer you'll need to generate adequate income to live comfortably. The length of your retirement will depend upon when you plan to retire and your life expectancy. Determining when you will retire is an important decision which will be driven by your career, personal goals, health and financial situation. If you are healthy and want to retire before you turn 60 it will end up costing you a lot more than retiring at 65.
4. Estimate Your Life Expectancy
What if you outlive the savings and investments you have set aside to fund your retirement? To guard against that risk, you'll need to estimate your life expectancy. As I mentioned in the previous paragraph, the age at which you retire isn't the only factor that determines how long you'll be retired. The other important factor is your life expectancy. We all hope to live to an old age, but a longer life means that you'll need to plan on funding your retirement over a longer period. You can use any number of resources to estimate your life expectancy including; government statistics, life insurance tables, or a life expectancy calculator to get a reasonable estimate of how long you'll live. These estimates are based on your age, gender, race, health, lifestyle, occupation, and family history. Please understand, these are just estimates. There's no way to predict how long you'll actually live. Since they are estimates and with life expectancies on the rise, you should assume you'll live longer than you expect based upon these estimates. Therefore, you should plan on it...
5. Identify Your Sources of Retirement Income
Now that you have developed an idea of your retirement income needs, your next step is to review your sources of income to determine how well prepared you are to meet those needs. Perhaps your employer offers a traditional pension that will pay you monthly benefits. Another source you can likely count on to provide a portion of your retirement income is Social Security. You can obtain an estimate of your Social Security benefits by visiting the Social Security Administration website (www.ssa.gov). Additional sources that can generate retirement income include 401(k) or other retirement plans, IRAs, annuities, real estate investments, stocks and bonds. The amount of income you might receive from those sources will depend on their value, the rate of investment return you earn (which may fluctuate significantly each year), and other factors. Finally, if you plan to work during retirement, your job earnings will be another source of income.
6. Make Up Any Income Shortfall
If you are well prepared, your expected income sources will be more than enough to fund even a lengthy retirement. But what if it looks like you'll come up short? Don't panic, there may be steps that you can take to bridge the gap. A financial professional can help you figure out the best ways to do that, but here are a few suggestions:
- Try to cut current expenses so you'll have more money to save for retirement
- If you have adequate time, consider reallocating your assets to investments that have the potential to substantially outpace inflation (but keep in mind that investments that offer higher potential returns may involve greater risk of loss) - you should seek the assistance of a financial professional with this one
- Lower your expectations for retirement so you won't need as much money
- Plan on working part-time during retirement for extra income
The information provided in this document is for general informational purposes only and is not intended to be a substitute for specific individualized tax, legal or investment planning advice. The type of securities and investment strategies mentioned may not be suitable for everyone. Each investor should review a security transaction and investment strategy for his or her own particular situation. Data contained herein is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed. Where specific advice is necessary or appropriate, consult a qualified tax advisor, CPA, financial planner or investment manager.
Mark Keramidas - Rollins Financial, Inc.
Telephone - 678.733.4848
Website - www.rollinsfinancial.com
E-mail - email@example.com