Many individuals often spend countless hours and financial resources in order to determine what their retirement income will be and from what sources it will come. Others start their social security and pensions if available, and whatever shortfall which might exist, those funds are pulled from their personal investments. This may work for some individuals, but others may find they have run out of funds long before they have run out of life.
Those retiring must do two things. First, they should determine how much disposable income is needed to cover their living expenses, financial surprises, planned purchases, and income taxes. Some may refer to a rule-of-thumb of sixty or eighty percent of their gross salary at the time of retirement. This may be a starting place, but the final number may be significantly different. Many employers offer a variety of deductions in addition to the mandatory tax deductions. Thus a close examination of the paycheck would be in order. The deduction will range from 7.65% for Social Security and Medicare, to as much as thirty percent or more for other expenditures that will not continue into retirement. There may also be monthly expenses paid that will change, such as costs for business attire, parking, and transportation to name a few. Additionally, there may be new expenses such as hobbies or increased travel costs due to new found time during retirement.
Once the income amount is known, then a calculation of the fixed income that will be received is the second step. When the amount of social security, pension income, and any other fixed sources are known, then the amount of reliance upon personal investment assets that will exist can be determined. If funds will be need to be pulled from personal holdings, it is wise to determine the withdrawal rate. This is the expected annual amount withdrawn divided by the value of the accounts available to produce the income. In today’s low interest rate environment, a high withdrawal rate can be an indicator to future troubles. There is no set rule, but I personally prefer to see withdrawal rates less than seven percent.
If the withdrawal rate is below seven percent, that does not exempt the investor from future trouble. If the assets are invested very conservatively and are only generating two percent income, then the current withdrawals could be depleting the account unless the investments are changed or the annual withdrawals are reduced. It is our opinion the investments should be allocated in a manner that will over time produce income and increased value at a rate greater than the withdrawal rate.
If the withdrawal rate is such that it may prevent the assets from lasting your lifetime, a change in lifestyle may be required. Unfortunately, there are no money trees that can be grown to produce the missing income, and a change in spending may be necessary. Recognizing this need sooner rather than later, may allow the reduction in lifestyle to be smaller than if the changes are made years in the future.
Another estimate that needs to be conservative is the projected lifespan. Sadly, there may be many retirees that will have all the income they need as long as they check-out at age 80. With changes in healthcare, personal living habits, and other factors, it may be wise to estimate the lifespan at age 95 or even 100. Doing this may also raise the awareness early that changes in spending may be required in order to avoid running out of income.
To assist in maintaining retirement income, future long-term care costs must be considered and a plan created. These costs when they occur can wipe out investment assets quickly, leaving the healthy spouse with far less income. While we would like to believe long-term care needs will always impact the other person, it is becoming a reality that more and more seniors are being impacted by these costs.
For assistance with portfolio allocations, insurance, estate planning, or investment management contact me at Quality Financial Concepts or one of the other Certified Financial Planners in our area. To continue a personal quest for education, you can also view our learning center on our website, www.goqfc.com. There you will find articles on a variety of topics, on-line seminars, calculators, as well as a host of other free tools