Have you ever heard someone talk about having their "number" for retirement?
I loved this old ING commercial that showed people literally carrying around their "Number!"
The idea is that if you can figure out what your top number is, you can save for that and everything should be okay, right? Today we'll talk more about what I call "Retirement Design." I have a few ideas about how to design the retirement you desire and hope for.
While having a number is an important part of a financial plan, what I've found is that determining how and when you think you'll spend your money could be the difference between a tough retirement and a glorious retirement.
Here's how the math usually works. For example, you shoot to save $1 million.
Planners have historically said that you can plan on living on 80% of your pre-retirement income.
You estimate that you'll get 5-6% returns on your portfolio in retirement, so you can pull 5% per year and the account should stay about flat. You also have $1,000 per month from social security.
That comes out to $50,000 per year from your retirement, and $12,000 from SSI.
So about $5,166 per month. You need $5k, we're good. All done planning, right? Don't stop here. We need to think about 3 factors:
We will talk more in future posts about taxes being a risk in retirement, but today, focus on what you'll actually take home. A 401(k) and social security benefits are both taxable. Yup, you get SSI back from the government and then they tax you on it again. Damn… Anyway, $62k for a single person is in the 25% bracket. There are some adjustments to make for approximate effective tax rates, but let's estimate and say you only get to take home $48,980. That’s $4081 per month. Ugh!
Fix This: A ROTH IRA, ROTH 401(k), or Permanent Life Insurance could be a great way to supplement your plans with some tax-free income at retirement.
2. Early Burn Rate
Imagine you've worked hard for 40 years and you've saved money like crazy. You finally retire and don't have to work ever again!!
What are you going to do with your time and money? Spend it! You now have an extra eight hours per day to do things. You may want to travel, see some shows, spoil the kids and/or grandkids.
Whatever it may be, in their first few years retirees typically find themselves spending as much if not even more than they did while working.
The average may be 80% of what you needed to live on before retirement, but it might be 100% from ages 62-70, and then 60% from ages 70-90.
Fix this: Work with an advisor or online planning tool to run some simulations. If you spent X amount for X number of years, how fast does your savings plan run out?
There may be a once in a lifetime cruise around the world that we can go on! Or there may be a broken hip in your household that really messes up the game plan.
A big mistake we often see couples make is that they don't have any life insurance when they retire. Hopefully the kids have moved out and the house is paid off, so it would make sense that you had term life insurance and saved a few bucks, right? Then the term coverage ended and you don't have anymore life insurance.
If two spouses each get a social security check, when once spouse dies, the survivor only gets the higher of the two checks. Life insurance could help make up for the missing SSI check.
Another issue is long-term care. You may have saved up $4.92 million just like you planned, but if a loved one goes into a nursing home, you may eat up a lot of money in long-term care expenses, leaving the other spouse with less than they planned on.
Fix this: Don't just get to your "number." Have a buffer. If you need $2 million to retire the way you want, plan for $2.5 million to have some cushion. And don't forget about your insurance plans. Life insurance and Long-Term Care coverage will likely still be relevant in your later years!
When it comes to retirement, we know that we should formulate our wealth.
And we shouldn't stop once we're done working. A sound retirement will have some taxable money, some tax free money.
A good position to be in would be to have some guaranteed money to cover our regular bills and some money that can vary with the market and our experiences.
Knowing how fast we can spend our extra play money can provide a lot of confidence. Lastly, be ready for the surprises that could totally mess things up in your later years. You want to be ready for changes in whatever your plan was. The goals should remain the same, the plans will change, but we will always have a plan.
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