Mapping the Basics
An increasing number of women are taking the lead in financial affairs – whether for themselves, their families, or in response to an unfortunate loss of spouse. A couple critical questions should be asked (and no, not just by women): “What does retirement mean to me?” And, “how do I determine if I am getting the right advice (and complete advice)?” Many clients we meet who are preparing for life in retirement aspire to travel, volunteer, develop their hobbies, begin a new and exciting career, and more. Whatever your goal, a retirement income plan that’s designed to support the retirement lifestyle you envision, and minimize the risk that you’ll outlive your savings is critical.
What’s Your Retirement Timeline?
Identifying this target date as early as possible is helpful, because when you retire will affect how much you need to save. If you retire at age 55 for instance, as opposed to waiting until age 67, your accumulation period is abbreviated by 12 years. You will also increase the number of years that you’ll need your savings to sustain you.
A couple more important considerations:
• The longer you put off retirement, the longer you can build up tax-deferred funds in your IRAs and employer- sponsored plans like 401(k)s, or accrue benefits in a traditional pension plan – if you happen to be one of the few who still have one!
• While you can start receiving your Social Security retirement benefit as early as age 62, your benefit may be 25 percent to 30 percent lower than if you waited until full retirement age. Likewise, your delay of retirement past full retirement age could enable you to increase your Social Security retirement benefit.
• If you are married, and you and your spouse are both employed and nearing retirement age, consider the benefits of staggering your retirements. In circumstances where one spouse earns much more than the other, it can make sense for that spouse to keep working in order to maximize current income and aid the financial transition into retirement.
How Long Will Retirement Last?
The challenges presented by longer lives can be particularly acute for women, who generally live longer than men. While always an interesting experience, one should attempt to estimate life expectancy to better determine the amount of resources needed to carry them through retirement, while maintaining the desired lifestyle. Such helpful resources include: government statistics, life insurance tables, or life expectancy calculators. These estimates are based on your age, gender, race, health, lifestyle, occupation, and family history. Please keep in mind that these are simply estimates. And it is generally advisable to over-estimate, rather than under.
How Much Will You Need?
Once you know when your retirement should begin, its estimated length, and the type of retirement lifestyle you desire, it will be important to determine how much you will need to keep you there. One of the biggest retirement planning mistakes you can make is to underestimate the amount you’ll need to save by the time you retire. It is often said that you could need 70% to 80% of your pre-retirement income after you retire. You should focus on your actual expenses today and consider whether they will stay the same, increase, decrease, or even disappear by the time you retire. You should also keep inflation in mind. Help is available for this determination and it should be utilized.
Understanding the Sources of Income
Once you have an idea of your retirement income needs, your next step is to assess how prepared you (or you and your spouse) are to meet those needs. Where are the retirement funds coming from? You may be able to count on Social Security to provide a portion of your retirement income. Do you have a pension or other source? You may also have a 401(k) or other retirement plan, IRAs, annuities, and other investments. The amount of income you receive from those sources will depend on the amount you invest, the rate of investment return, and other factors. Finally, if you plan to work during retirement, your earnings will be another source of income. When you compare your projected expenses to your anticipated sources of retirement income, you may find that you won’t have enough income to meet your needs and goals. Closing this difference, or “gap,” is an important part of your retirement income plan.
Taking “The Plunge”
While retirement is certainly a time to celebrate, working to maintain your strong standing into and through retirement with vigilance is an ongoing task. This is where working with a leading financial planner/advisor can make a tremendous difference. Monitoring your progress, your portfolio, and identifying opportunities to adjust to life changes or maximizing new (and appropriate) avenues can have an incredible impact. Here are a few more pointers:
• Regular Portfolio Reviews with your Trusted Advisor. Summit suggests that retirees should value the safety of their principal above all else. While it generally makes sense for your portfolio to become progressively more conservative as you grow older, it may be wise to consider maintaining at least a portion in growth investments. Again, your advisor can guide you well on this consideration.
• Spend wisely. Conscientious spending is always a smart way to go, whether you are in retirement or just beginning your financial journey. Spending during retirement can be incredibly easy, particularly when we have a little more time on our hands. Remember that if you whittle away your principal too quickly, you may not be able to earn enough on the remaining principal to carry you through the later years. One of the primary benefits your financial planner should afford you is the ability to enjoy your wealth and maintain your lifestyle – with prudence.
• Understanding your retirement plan distribution choices is big. Whether you have a pension, annuity, retirement account, or another source, your advisor can help you with this difficult, but important, decision.
• Which assets to use first? For many retirees, the answer is simple in theory: withdraw money from taxable accounts first, then tax-deferred accounts, and lastly, tax-free accounts. However, this is not a blanket statement and special considerations should be made before choosing. Also, don’t forget to plan for required distributions, should you have a qualified retirement account. You must generally begin taking minimum distributions from employer retirement plans and traditional IRAs when you reach age 70½, whether you need them or not.
These key financial points are intended to be “conversation starters” and not directed advice. While these items can and should be examined by you, with your trusted advisor, with the right guidance you can take control of your retirement and enjoy the freedom to plan your future with confidence and excitement. This is why you’ve worked, saved, and made the great decisions to get you where you are today. Call us today – we can help.
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©Summit Wealth Partners, Inc. 2012