So You’re Thinking About Retirement
The old “rule of thumb” for retirement is that you will need about 70 percent of your pre-retirement income during retirement. This may be true for some folks, but generally we’re seeing new retirees spend 100 percent or more of their pre-retirement income during retirement.
A key reason for this is that people who retire today at age 65 are generally in much better shape than their parents were a generation ago. Instead of parking in the rocking chair and watching the grandkids, today’s retirees are leading active, productive and busy lives. Furthermore, retirees today are generally coming off of their peak spending years; the time between paying the last college bills and starting their retirement. This means that as they enter retirement, they are often accustomed to a higher level of lifestyle related spending than their savings can realistically support. Down shifting your lifestyle by 30 percent (to 70 percent of spending) is a very hard thing to do, but it can be done with proper planning and preparation. Following are some frequently asked questions.
When should you start preparing for retirement? The short answer is the sooner the better, but at the very least you should start about 10 years before you think you will be ready to retire. For someone thinking about retiring at 65, that would mean starting to prepare for it in your mid-50s. This will allow you to make early decisions (and possibly significant changes) on things like investments, planned expenses, insurance and other related topics.
How much annual income will you need?
You should start by making a detailed list of your current mandatory expenses like utilities, mortgage payments, groceries, etc., and then add discretionary expenses like vacation, travel and dining out. Finally, add replacement costs for things like refrigerators, cars, and the like. This will put you in the ballpark. As I said earlier, today’s retirees may need closer to 90-100 percent of their pre-retirement income. And because there are fewer traditional pensions and increasing financial stresses on Social Security, future retirees may find they’ll have to rely more heavily on their own savings and other resources.
How will I know when I’ve saved enough (or how much can I withdraw from my savings each year)?
Unfortunately, there is no easy answer to this one. Factors like inflation, investment returns, living expenses, life expectancy and life’s little surprises all impact your ability to draw from your savings. The most common rule of thumb is that your annual withdrawals should be less than four percent of your savings when you initially retire, but this is MUCH TOO SIMPLISTIC to bet your retirement safety on. The best way to target a withdrawal rate is to meet one-on-one with a Certified Financial Planner ® practitioner and review your personal situation in detail – but you probably knew I was going to say that. If you would like more information on this topic, please feel free to call or email me, and I’ll be happy to send you a copy of past articles I’ve written about sustainable withdrawal rates.
Is there a recommended way to begin withdrawing from your savings?
This is going to be very dependent on your own situation, but generally speaking we suggest tapping taxable savings first, leaving your IRAs and retirement plans to continue growing tax-deferred as long as possible. You will eventually be required to start withdrawing these funds at age 70½, but the longer they can stay tax sheltered, the better. Still, this is an area where advice needs to be tailored to your specific situation, so talk with a Certified Financial Planner ® practitioner to find out what will work best for you.
In the meantime, I hope you have had an enjoyable holiday with family your and friends. Happy Holidays!
This column is prepared by Rick Brooks, CFA, CFP®. Rick is Vice President for Investment Management with Blankinship & Foster, LLC, a wealth advisory firm specializing in comprehensive financial planning and investment management. Rick can be reached at (858) 755-5166, or by email at brooks@bfadvisers.com. Rick and his family live in Mission Hills.
Category: Business
