The most important steps for a comfortable retirement
Most people think聽they鈥檒l be ready to retire when they hit a certain age or accumulate a set amount of assets. Unfortunately, they rarely do the math to determine whether their savings will sustain them after they retire.
According to the 2015 Retirement Confidence Survey by the聽, only 48% of workers reported that they or their spouses have tried to calculate how much money they鈥檒l need to live comfortably in retirement, and people聽who did聽attempt this calculation generally 鈥済uesstimated鈥� the numbers.
The EBRI found that most Americans spend more time preparing for the holidays than for retirement.
To stay out of financial trouble after聽you retire, it鈥檚 important to start planning well ahead of time. And that involves taking a hard look at the numbers.
Work the problem
聽is a big math problem, and to get the right answer, you must plug in the right figures. To start, you聽must have a good grasp of how much income you聽can expect from retirement income streams such as Social Security and pensions.
The next step is crucial: understanding how much you鈥檙e going to spend in retirement. This can be much tougher to predict, but accurate聽projections can mean the difference between having adequate funds for the rest of your life and outliving your savings. Neglecting this important step before making the decision to retire is unwise;聽deciding when聽to retire should be based on your financial capacity.
That鈥檚 because once you鈥檙e retired, your聽main source of income ends, and expenses will be covered out of savings, investments and retirement income streams.聽Spending is perhaps the biggest variable in retirement planning calculations. It鈥檚 easy to be complacent during working years, when a聽steady paycheck is coming in. So it makes sense that a huge paradigm shift occurs when the paychecks stop and cash flow shortages have to be covered from savings. Creating your own paycheck from your savings can be overwhelming.
Set a retirement spending plan
For all of these reasons, establishing a realistic retirement budget is critical. To do this effectively, consider these steps:
1. Envision your life during retirement.聽Make a list of what you鈥檒l be doing and how you鈥檒l be living. What will聽a typical day look like? What kinds of hobbies or volunteer work will you participate in? Will you embark on a second career? How much will you travel? Will you move to another location or maintain two residences? How much support will you provide for your kids and grandkids? What is on your bucket list and how much will realizing it cost?
2. Keep track of your current spending for at least three months.聽Be sure to include expenses that occur less frequently, such as insurance and dues.
3. Review this spending record.聽My clients are often surprised to see聽where they鈥檙e spending their money. This exercise enables them to align their spending with their goals, values and desires. They鈥檙e more committed to a spending plan once they have determined where their money is going because this prompts them to set priorities to ensure that they don鈥檛 spend frivolously or on items that aren鈥檛 priorities.
4. Make changes in your spending now to reflect the retirement lifestyle you envision.聽How will your expenses change upon retiring? Does your spending jibe with the goals you identified in the first step? Be sure to revise entries for certain expense categories, such as travel, entertainment and housing, to reflect these goals. Don鈥檛 forget to account for uncovered medical expenses and supplemental health insurance premiums, including Medicare Part B.
Watch your withdrawal rates
Once you have put together a spending plan, you can determine how much of your expenses would be covered from your investments. Most financial planners recommend that people who retire at 65 withdraw no more than 4% of savings annually. If you withdraw much more than that, you鈥檙e likely to outlive your funds, so you might聽need to work longer. If you retire earlier than 65, you will likely need to adjust that withdrawal rate downward, as you鈥檒l be making withdrawals longer.
Consider working with a financial planner who specializes in retirement planning. He or she can walk you through the planning process and potentially give you confidence about the capacity of your investment portfolio to provide adequate income after you retire. The planner can also help you realize that you鈥檙e not on track and need to make changes.
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