Are You Really Ready for Retirement?
Jayne Di Vincenzo AIF ®, CEP ®, President of Lions Bridge Financial Advisors
There’s a canyon-sized gap in understanding of the thought and detailed planning that should go into heading into nearly 25-30 non-working years of retirement. Most wannabe-retirees ponder two major questions: what’s the real cost of retirement and are they financially prepared?
The best answer is it depends. It depends heavily on how much money you plan to spend during retirement, what sources of guaranteed income you will have, your health, and even where you plan to retire.
Only one out of five people 65 or older said in a U.S. News & World Report survey that they would consider moving, so let’s assume you’ll retire here in Virginia, and you stop working at 65.
Here are some steps to determining the cost of your retirement:
Dream. How you want to spend your 15-25 years of retirement? Do you plan to sit in a rocking chair and knit or travel extensively? Do you want to reward yourself with the sports car that you resisted during your working days, or will you hang onto your 2012 Honda Accord for as long as possible?
Create a current-year budget. It doesn’t have to be perfectly precise, but figure out what you spend now per month. A good place to look is your monthly credit card statement and bank statement. Many are surprised to realize just how costly regular trips to Starbucks or after work cocktails and dinner with friends is really costing. Start with as many expenses as you can, then include your entire income, including your salary, dividends and whatever else you receive that is taxed. This will help you create a second budget, your retirement budget. (Find our Expense Worksheet here.)
Create your retirement budget. Many are surprised to hear that even with Medicare coverage that their out-of-pocket healthcare expenses average $250,000 per person over 25 years. These costs are the result of co-pays, supplemental plans/insurance, dental care, and uncovered costs like hearing aids, medical tests and many common procedures.
Begin by growing your first year’s budget (income and expenses), and continue growing costs for 25 years after you plan to retire (so to age 90 for most). It’s important to factor in inflation – we use the 3.75% (which is based on a 30-year average inflation rate). This will allow your expenses to compound annually and over time help the budget you establish stay more realistic and keep up with rising costs.
How much to budget for long-term? The U.S. Department of Labor says most retirees’ will need somewhere between 70 and 90 percent of their pre-retirement income. I have seen many clients retire and need more or about what they made during working years for 1-3 years post-retirement (usually fixing up homes and traveling extensively to make up for years of working). A couple with an annual income of $100,000 typically will need at least $70,000 annually longer term during retirement years, and again, growing by 3.75% or so annually to keep up with inflation.
Consider what AARP describes as the “three legs of the retirement stool.” That’s Social Security, pension and savings. Social Security on average provides only about 20-40 percent of what folks need to retire. Pensions? Few workers today have one. The U.S. Bureau of Labor Statistics reports that only about 20 percent of us have a traditional pension. As a result, it’s important to have sufficient savings. The third leg, savings, can come from years of socking away money in a 401(k), IRAs, and after-tax investments. Many clients rely heavily on savings to travel, for health and family emergencies, for home improvements and more. So, the more you sock away today the less you’ll have to give up during retirement.
Math Basics: grab the calculator. Let’s say you and your spouse make a combined annual income of $100,000. Based on the DOL estimate, you’ll need at least $70,000 a year to live during retirement the way you do now. You can expect to receive about $32,000 from Social Security, leaving a gap of $38,000. Assume you and your spouse have no pensions coming and that you have each saved about $225,000 in your 401(k) plans. Divide $450,000 by 25, (number of years you can expect to live after you retire at age 65), and you’ll get $18,000.
The bad news is $18,000 + $32,000 = $50,000 - a whopping $20,000 less than the $70,000 you targeted.
If you’re close to retirement, you may be able to increase the amount you contribute to your 401(k) plan (maximum contributions for 2018 are $18,000 and if you’re 50+ years of age you can contribute an additional $6,000 catch up to $24,000) either pretax or in a ROTH 401(k) if your employer offers that. If you haven’t saved enough, you will have to set priorities –either work a few more years or spend less in retirement.
If you have five or more years to retirement, you may want to talk with a professional about ways to save more money, rebalance your investments* and seeking to increase your income and lower expenses.
*Rebalancing a portfolio may cause investors to incur tax liabilities and/or transaction costs and does not assure a profit or protect against a loss.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
The Roth IRA offers tax deferral on any earnings in the account. Withdrawals from the account may be tax free, as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change.
This is a hypothetical example and is not representative of any specific investment. Your results may vary.
Jayne Di Vincenzo, AIF ®, CEP ® has 18 years of experience in financial services. She holds a 24 General Securities Principal, 53 Municipal Principal Registration, Series 7, 63, 65, 31 registrations & life and health insurance licenses with LPL Financial. Securities and advisory services offered through LPL Financial, A Registered Investment Advisor (RIA), member FINRA/SIPC. Lions Bridge Financial Advisors, 2110 William Styron Square, Newport News, VA 23606 (757)599-9111 www.LionsBridgeFA.comJayne@LionsBridgeFA.com.