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304 North Cardinal St.
Dorchester Center, MA 02124
Retirement lasts longer today than it did almost 80 years ago when Social Security was instituted. In 1935, when the Social Security Act set the retirement age at 65, the average retiree could expect to live about five more years.
Cut to 2023 and things have changed. Many retirees can reasonably expect to live another 25 years after hanging up their cleats, and it’s not unusual to see Americans who live well into their 90s.
“The key question is not how long your retirement savings will last but how long you will last,” says Kelly Palmer, founder of The Wealthy Parent, a fee-only financial planning firm in Chicago.
While life brings plenty of surprises that no one can control, it’s best to focus on factors you can, Palmer says. Lifestyle is one such factor.
“You will not spend less in retirement, and your cost of living will increase,” she says. “If you need convincing, look at your current weekend spend rate versus weekday spend rate. Assuming you work Monday through Friday, I imagine you will find a much higher weekend spend rate.”
In addition to increased spending on travel and leisure activities, which may be pricier than expected, retirees generally find that other costs loom large.
“When people get older, there are costs associated with aging, and spending on health care and prescription drugs can also increase the expenses,” says Jennifer Kim, senior partner at Signature Estate & Investment Advisors in Los Angeles.
She points to long-term care, which often necessitates hiring people to provide custodial, intermediate, skilled nursing or hospice care. If not properly planned for, those expenses can erode a lifetime of savings, Kim says.
“Many also forget that since there are no more tax deductions enjoyed while working and contributing to 401(k)s and pension plans and having a house all paid off, their taxes are just as high during retirement as they were while they were working,” Kim adds.
Inflation is another cost that many investors fail to take into account.
While a financial planner can do a sophisticated and comprehensive analysis of an investor’s overall situation, it often helps to begin with some do-it-yourself calculations to get the big picture.
“Online calculators have become much more sophisticated in the past five years,” says Melody Evans, wealth management advisor at TIAA in Andover, Massachusetts.
“A simple Google search or visiting the website for your employer’s retirement plan will usually point you to a calculator to determine roughly how on track you are in your savings,” she says.
The closer you are to retirement, the more accurate these calculators are likely to be, Evans adds.
Planning is the most important aspect of a successful transition into retirement, says Kim Gattis, wealth advisor and team leader at UMB Bank in Wichita, Kansas.
“Instead of thinking about how long your savings can last you, consider instead calculating your retirement needs and work toward hitting that number until you reach retirement age,” she says.
When doing your calculations, Gattis suggests reviewing factors including:
Those are good places to begin, as they cover many of the essential life expenses before factoring in the more fun expenses, such as travel, hobbies and entertainment.
“There are a variety of calculators available to assist with retirement planning,” Gattis says.
The 4% withdrawal rule is a guideline that many planners and individual investors use. In recent years, it has come under scrutiny.
The rule guideline was developed by financial planner William Bengen in the early 1990s. As the name suggests, it advises retirees to withdraw 4% of their initial retirement portfolio balance in the first year of retirement, adjusting subsequent withdrawals for inflation.
This approach aims to balance a comfortable retirement lifestyle with long-term savings preservation. The rule is grounded in historical market data, indicating that a balanced portfolio of stocks and bonds should sustain that withdrawal rate over a 30-year retirement.
“The 4% rule is still a good rule of thumb but it shouldn’t be your only planning metric,” Evans says. “Be prepared to meet with an advisor yearly to address your spending and giving goals compared to your investment performance to help you stay on track.”
The more guaranteed income retirees have from Social Security, pensions, annuities and other sources, the less need they will have for an investment portfolio to generate that 4% year after year.
“The 4% rule is not set in stone for every individual,” Gattis says.
Rather than rely solely on that withdrawal rate, she recommends that investors take some additional steps.
“Carefully structure your withdrawals to be tax-efficient,” she adds. “This may include a mix of withdrawals from your qualified retirement investments as well as your after-tax investment accounts.”
Retirees should also be aware of some potential problems with that strategy, says Heath Hampton, lead wealth advisor at Boston-based NDVR.
For example, there’s a risk of living longer than 30 years in retirement.
In addition, “The possibility of higher inflation rates in the future would definitely stress the 4% rule,” he says. “With inflation rates increasing, retirees will need to withdraw more money just to maintain their current lifestyle.”
Income flooring is a financial strategy that begins by ensuring essential expenses like housing, health care, food and other basic living costs are covered by guaranteed sources of income, such as Social Security, pensions or annuities.
This strategy can give retirees peace of mind knowing their fundamental needs are met, regardless of market fluctuations or economic uncertainties.
“Clients who have planned to have guaranteed income sources cover their fixed expenses seem to experience less market-related anxiety in retirement,” Evans says.
While not the best fit for all retirees, income flooring can help create stability in planning for those who feel vulnerable, Evans says. “The idea of replacing your paycheck from one pool of variable investments can be very intimidating for soon-to-be retirees,” she says.
Kim says income flooring is a good exercise to determine an investor’s spending in retirement and to separate the needs and essentials from the wants, which are variable expenses.
A preretiree can calculate essential expenses from the income floor to determine whether predictable and reliable sources of income are enough to meet those needs.
“If these sources are enough to cover the needs, then the person can dial up the wants from the funds left over,” Kim says.