Retirement Income and Financial Planning for the RetireesBeau Ruff
Every plan for retirement is different and every person has different dreams for his or her post-work life. Whatever dream you have for retirement, and whatever passions you wish to pursue, there is one thing that every retirement will have in common. A number to achieve your goal.
That number – essentially the cost for your retirement – is one that considers your goals and the lifestyle you wish to lead in retirement. It also factors in expenses like health care and taxes, as well as inflation and other risks.
Some retirement costs will be lower, such as for the retiree who looks forward to relaxed days at home or spending time with family. Others will be higher – the retiree who plans extensive exotic travel or wants to buy a second home in a retirement destination. If leaving a legacy to your heirs is important to you, this will further impact your retirement’s bottom line.
Some of you may have an idea of the cost of retirement and the associated number, either by way of using a retirement calculator like the one available through your Wealth Vision portal, or through discussions with the team here at Cornerstone.
For those of you who don’t have a solid sense of what your retirement will cost, we welcome the opportunity to chat with you. As some of you know, one of the reasons we joined LPL Financial is because of the significant technological advances they offer, to include our financial planning software Wealth Vision, which we believe is the best available anywhere. We can run an analysis through Wealth Vision based on your current living expenses, your goals and expected lifestyle in retirement, and other factors. The results will be the first step in creating a retirement financial plan that guides how you will spend your retirement income.
Sources to meet your needs
For most people, it is likely that your needs will be met by three primary resources: Social Security, company pension plans and personal assets.
Social Security can provide a basic foundation for retirement income as well as some surprising flexibility. For instance, delay your filing by a few years and watch your monthly payments rise considerably. A look at 2014 average monthly Social Security benefits shows that the retiree who filed early at age 62 received $970.50/month. That’s $323.50/month less than what he would have received if he waited until his full retirement age of 66 and $737.50 less than if the same retiree delayed filing until age 70.
However, a larger payment later in life is not always the preferable course of action. In fact, after running these illustrations hundreds or thousands of times, it appears to us that the “breakeven” point is at about 78 or 79 years of age. Our common question to clients is “would you rather spend more money before you are 78 years old or after you are 78 years old. In most cases, our clients prefer to draw the social security early.
This illustration is just the tip of the iceberg for your Social Security filing options. You’ll be surprised by the flexibility that Social Security offers, with countless filing strategies to support your retirement income needs and optimize your benefit.
Company Pension Plan
Fewer and fewer Americans can rely on a company pension today. Less than one-fourth of Americans receive pension benefits and the number is declining as corporations scale back and offer the less costly 401(k) in lieu of pensions. Accordingly, Baby Boomers will likely be one of the last generations to benefit from a pension in retirement. To further complicate the analysis of how the pension plan plays into your retirement, it is important to understand that a great many company pension plans do not include any inflation protection. Thus, the buying power of the pension is often reduced (sometimes significantly) over time.
Like Social Security, pensions offer a great deal of filing flexibility, and you’ll need to fully understand each option before deciding on one. With a pension and Social Security, in most cases once you make your filing decision, you can cannot change it.
For most people, Social Security and pension income will not fund your entire retirement and your personal assets will play a major role in filling the gap.
Personal assets are those assets aside from your social security and pension benefits that provide you income and wealth. Examples of personal assets include assets like a 401(k) or 403(b) as well as personal investments and savings accounts. Personal assets might also include other sources of income, such as income from working in retirement, business interests, proceeds from selling your house, and support from family.
Managing Market Volatility in Retirement
A primary concern for some pre-retirees is market volatility affecting their assets. While there’s no way to know whether a market decline will coincide with your retirement, there are ways you can moderate the effect of a volatile market on your retirement portfolio.
- Take a conservative approach to withdrawing your retirement savings. Enter retirement with a realistic view of how much income you’ll need to support your expected standard of living
- Maintain a sensible asset allocation. Keep your portfolio divided among stocks, bonds and cash to reduce the impact that any single low-performing investment can have on your overall portfolio performance.
- Review and rebalance your portfolio. Periodically review your investment strategies with your advisor to ensure they still reflect your needs. Fluctuations in the market may cause your asset mix to become overweight in an asset, asset class, or industry. This could expose your retirement nest egg to damaging setbacks. Similarly, as you grow older, you may want to increase your portfolio’s exposure toward bonds, for their ability to produce income.
- Be flexible with your retirement goals and timetables, if needed. Should your retirement coincide with a period of market volatility, your retirement goals and timetable may require reevaluation. An upswing may mean that retirement could come sooner than you planned, a downswing may mean less money will be available for leisure activities or travel.
The key to the complete analysis of your retirement financial plan is our financial planning software, Wealth Vision. By combining Wealth Vision’s robust suite of financial analysis along with your advisor’s guidance, we can help you navigate the options and prepare a path to your customized plan. Call us for more details.