Retirement should be a reward for years of hard work, and you don’t want to have to pinch every penny. You should be able to do the things you couldn’t when you were punching a clock every day.
You should be able to look forward to retirement as one of the best times of your life.
But, do you have enough money to live a comfortable life into your 60s, 70s, 80s, and beyond? Consider some common concerns, including:
1. How much will you have available to support yourself?
Maybe not as much as you think. Financial professionals used to say you’d likely be OK in retirement if you started with a 4% annual withdrawal rate. But research by Morningstar’s head of retirement research, David Blanchett, may have changed that theory.
Co-authored by two college professors who are experts in retirement planning, Michael Finke and Wade D. Pfau, the analysis found that a 2.8% withdrawal rate over a 30-year retirement had a much higher chance of success (90% vs. 48.2%) if interest rates remain low.
If you have $1 million saved, that would take you from $40,000 a year down to $28,000. That’s quite a difference, and definitely something to keep in mind when you’re drawing up an income plan.
2. Have you protected yourself against inflation?
Many retirees don’t even think about inflation when they’re making their plans. They say, “I’ve got $1 million divided by $40,000 a year, and that should last me 25 years.” But if the rate of inflation does increase, and you haven’t made adjustments to deal with it, it could take a real toll on your future income.
3. Are you managing risk?
One of the worst things retirees do in retirement (and pre-retirement) is have the same risk profile that you had in your 30s and 40s. When you’re drawing income from your assets, it’s incredibly difficult to come back from a market downturn – an experience lived by those who were getting ready to retire back in 2008. If you’re taking $3,000 or $4,000 a month from a depreciating asset, you’re going to run out of money much faster.
It’s important to bring risk under control, and you can do that with some common strategies such as:
Diversifying your assets: Don’t have all your eggs in one basket. Control volatility by choosing investments with a proven track record and having enough fixed income in your portfolio.
Including stocks in your portfolio could help keep your purchasing power as historically they have kept pace with inflation. Due to their growth potential and dividend payments they could help supplement your Social Security and pension. But remember, growth and dividends are not guaranteed.
Considering income annuities: This is one of the strategies Pfau and Finke came up with in the Morningstar study. Guaranteed annual payouts are normally 4% to 5% per year of the contract’s accumulated value, which has the potential to double the amount of income you’ll have.
4. Is your retirement plan tax-efficient?
Having taxes in mind become more important than ever at this point, as you phase into retirement and start using your saved assets you will need to start paying taxes on them. You should consider a tax strategy to help reduce your tax liability and keep as much of your assets as possible. Diversifying among different products like 401k plans, IRA’s, Investment and Savings accounts will give you several asset locations with different tax implications. This will give you options for a tax-efficient strategy as you begin withdrawing from them.
5. Are you prepared for health care costs?
According to the U.S. Department of Health and Human Services, 70% percent of people turning age 65 can expect to use some form of long-term care during their lives. Those are awfully high odds, and yet many Americans have no way to pay those bills—and Medicare only covers short stays under specific circumstances.
There are long-term care insurance policies, but because they’re expensive, many consumers aren’t buying. Instead, many are turning to alternative strategies, including life insurance riders that provide the option of tapping into your death benefits early. But even with insurance riders, the insurance contract must be suitable for the individual and they must have an underlying need for that product.
It really is all about planning for the worst and hoping for the best.
If you have a blueprint in place that addresses with these five concerns—a plan that’s amendable as times change so you stay on the right track—you have the greater potential to enjoy retirement.
Call your Private Banker to talk about the retirement strategies available to you.