Most people I talk to are worried about not having enough money to retire. They will ask me, “How much do I need to retire?” My answer is always, “It depends.” People need enough money to cover their expenses for the rest of their life. Running out of money before running out of life is not an option! They’re not sure how to plan for that income for life while still leaving some behind.
In the past, the general assumption was that a retiree could withdraw 4% to 5% from their investments to live on and maintain the bucket of money that would be passed to loved ones or charity upon their death. With interest rates at a near all-time low and the pain of past market losses, there’s no wonder why this concern for lifetime income is keeping people up at night. Factor in the possibility of a few down years in the market shortly after you start withdrawing funds and you could be set up for retirement income failure.
Other concerns are the potential need for home health or nursing home care. Many families have worked hard to save for their retirement, only to lose it all when someone can no longer live independently. Skilled nursing care can run up to $100,000 per year in some parts of the country. This can put a real strain on even the best financial plans.
How does someone plan for a positive outcome in retirement? The first step is to understand what retirement looks like. It is said that retirees should plan to live on 70% of their pre-retirement income. This is based on the concept that people will spend less during retirement. In my practice, I see my younger, healthy retirees spend the most in their early retirement years. They have the time to travel and enjoy life in a way they couldn’t while still working. As people get older and their health declines, there is a need for in-home assistance and even nursing home care. As those costs continue to escalate, living on less money in retirement will be a myth for many.
Many retirees want to make sure they leave something for their children and favorite charities, but if they run out of money that dream will never be accomplished. So, what are their options? By planning for their income needs for life and understanding all sources of income, namely, Social Security and pensions, an advisor can work backwards to see where their plan is lacking. If all of their income needs are comfortably met, they can look at ways to leave an inheritance to children or gift to charity.
Personally, I find that Social Security and pensions are not enough to fully cover the lifetime income needs. I also notice that people don’t consider the impact of a death of a spouse to their income plan. They are not factoring in the loss or decrease of a pension or spouse’s Social Security.
A person can work with an advisor to create a personal pension. By converting some of their investment assets into a lifetime income stream, they can create the guaranteed outcome of having enough money for life. Once an advisor has that piece in place, they can then look at the best assets to leave to children and charity. Does a life insurance policy to benefit the heirs or charity make sense? Does a plan that includes utilizing a tax tortured, qualified asset for a lifetime or legacy gift to charity work? Does stretching the IRA to children provide the best results? In many cases, it will be a combination of strategies that provide the optimal outcome.
If your advisor is only concerned about investment returns, asset allocation, and risk tolerances, you may be setting yourself up for a rocky retirement road. Consider an income plan that gives you the confidence to retire with a securely guaranteed outcome. You have worked hard to save for this time in your life. It’s time for you to enjoy the fruits of your labor with the knowledge that you will not outlive your money.