When planning for retirement, “Have I saved enough” is obviously a very big question that we ask ourselves, and probably one of the most common we help our clients answer.
At its core, what we are trying to determine is whether or not we will have enough income to cover our expenses when we stop working. So there are two sides to that equation.
Retirement Expenses
The first one is the expense side. In other words how much do we need to live, the way we would like to live when we’re not counting on income from a job. This is one item a lot of people that we see don’t have a good handle on.
So we recommend that you spend time analyzing your current expenses and also estimate which of those might go up, go down, go away, or which new expenses might pop up when you’re retired.
For example if you have young children, your current expenses might not be as accurate as they would be for retirement planning since you won’t have the same expenses like feeding, clothing, sheltering, children, putting them in activities. Paying for their sports, paying for their entertainment, paying for their cellphone, car insurance, birthday presents, health insurance. If you have young kids that are incurring those kinds of things. So a lot of those expenses will change as kids get older and then hopefully leave your nest and your income statement and balance sheet.
Obviously if you have kids in private elementary or high school or in college, those expenses should drop off at some point. So we could exercise this to figure out what your current expenses are and then drop off the obvious expenses that will no longer be there when you look to retire.
There will also be some expenses that will come on when you retire. For example if you’re covered by an employer’s health insurance plan and you retire before age 65 when Medicare kicks in, you may have increased cost for health insurance. That’s a big concern. We see this all the time with our clients.
Also if you have a current mortgage on your house, that expense might go away if you pay off your house before retirement. You might plan to downsize your house or up size your house and depending on how you finance that decision or any equity you get out of existing residence might help fund your retirement income.
So on the expenses side it’s a very wise process and well worth the time, to examine your current outlays and start to look at which ones you expect to go up as you approach retirement or end retirement, which ones you expect to go away, which ones you expect to change. And that will give you a sense of a good estimate of how much money you might need on a monthly or annual basis to live on when you don’t have a job to provide that income or don’t want to have a job, and you can’t or don’t have that salary.
If you own a business you also want to consider any proceeds from that, although many business owners over estimate that they might be able to yield from the sale of the business. We can discuss that in another article.
Retirement Income & Social Security
The other part of the equation is your income. There might be various sources of income that you can count on in retirement. First, almost everyone that we work with has some sort of Social Security benefit that they are drawing on or will draw on.
And despite the challenges that many people have pointed out in the Social Security system, we expect that almost everybody we work with, if they’re not already drawing a benefit, will draw a benefit at some point.
While we don’t know if it will be exactly what is projected, we tend to believe it will be fairly close, especially for people that are over age 50. You can read more about social security by clicking here
If you have a spouse, then you should have two Social Security benefits, even if only one of the spouses earned and paid into the system enough to get credit to earn their own benefit.
A spouse that never paid into the system can still draw a benefit for themselves equal to half of their working spouse.
Then you can add in any pensions if one or both spouses or single person has a pension benefit of some sort from a previous or current employer. And then of course whatever income your investments might generate, link to blog post about how to generate income.
The pension and Social Security income numbers are fairly easy to deduce from researching, from the pension company documents or information from their employer and Social Security benefits are the same way. Look to ssa.gov if you need more info.
Other Retirement Issues to Address
How to generate income for your investments depends on many different factors. But we tend to think a household can withdraw somewhere between 4% and 6% of their investment portfolio every year for 25-30 years with very little risk of running out, especially if that plan is monitored well by the household and a good financial planner.
You also want to consider any planned one-off expenses or outlays as you go through retirement. While you want to plan for the early stages of retirement and make sure that you have enough income to cover your projected outlays each month or year, many life events come into play that will affect the long range planning.
For example, if you have relatives that have a substantial estate and you expect to inherit part of that, you may want to take that into consideration.
While we don’t like to count on those sorts of resources coming into our life, if that’s inevitable, it only makes sense to address that or account for it in some way.
It might be that a family or a couple or individual can be a little more aggressive with their spending early in retirement if they’re fairly certain that they will have a future infusion of assets. You would still want to build a plan that allows you to survive surprises.
At that stage of life you may not have the time to recover from negative changes to the assumption that you’ve made. But we also find that our clients are not trying to leave behind the maximum amount of dollars all the time, they want to make sure they enjoy what they have.
So we often recommend spending a little bit more if the situation warrants it. And that’s where a good professional that can talk through the consideration should be of help.
Also if you know you might have to support an adult child or an aging parent, those potential consequences need to be thought through.
Retirement Risks
There are many different scenarios that can come up where some sort of insurance or other vehicle may be used to protect against risks.
For example, a long time care need may obliterate even the best financial plan, particularly if you have a couple. And in the rare event that both spouses need care for long periods of time at the same time, that can be catastrophic to a financial plan. So we often talk about ways to address that risk.
Will I have enough to retire or have I saved enough is a major question that most of our clients ask themselves at least some point in their working life. We enjoy visiting with people and try to help them answer that, not just as a snap shot but over the course of their careers and their lives, working side by side to assist them in making sure that they have a great plan in place that maximizes the chance that they get to enjoy their lives, not just in retirement but throughout their working lives.
One of tne of the best things we do is help people make sure they’re saving the right amount but not sacrificing unnecessarily, just to be able to enjoy life later.
If you have more questions about retirement, fill out the form on the top right of this page. We’ll provide you with a free retirement analysis to see where you are at. You can also shoot us an email at sean.kernan@lpl.com.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. There is no assurance that the techniques and strategies discussed are suitable for all individuals or will yield positive outcomes.