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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 people who are delaying their planning because they view it as too complicated or are simply overwhelmed by the number of choices that exist for their retirement.
Some become confused by seemingly conflicting news reports. 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 your age 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. Recent research indicates that 4% might be too high, so you may actually need even more. Also, prices are likely to rise during your retirement so you will need your nest egg to keep up with inflation.
The next step is to come up with a reasonable, simple 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.
As you get older and closer to retirement, you will reduce the volatility of the portfolio by reducing the stock holdings. It is better to err on the side of too conservative an assumed rate of return than 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.
Important Disclosure:
Alan Alderfer is a Partner, Managing Director at Beacon Pointe Advisors LLC. The information contained in this article is for general informational purposes only. Opinions referenced are as of the publication date and may be modified due to changes in the market or economic conditions and may not necessarily come to pass. Past performance is not a guarantee of future results. Beacon Pointe has exercised all reasonable professional care in preparing this information. The information has been obtained from sources we believe to be reliable; however, Beacon Pointe has not independently verified or attested to the accuracy or authenticity of the information. The discussions, outlook and viewpoints featured are not intended to be investment advice and do not consider specific investment objectives or risk tolerance you may have. All investments involve risks, including the loss of principal. Consult your financial professional for guidance specific to your circumstances.
