For adults, planning for retirement is a life-long pursuit. We have dreams of a wonderful lifestyle after saying goodbye to our careers. We never expect to be dependent on our kids, or the government or anyone else. This is what we’ve worked for. Unfortunately, almost half of retirees discover they didn’t do enough.
The Consumer Financial Protection Bureau says only 51% of retirees who left the workplace between 1992 and 2014 had enough income to maintain their spending level for five consecutive years. That’s disturbing but now surprising since the average Baby Boomer has only $144,000 saved for a retirement that can last 20-30 years.
The report went on to say that retirees who couldn’t maintain their lifestyle had to make major spending cuts, reducing expenses by 28% in the sixth year after they retired. What can you do to make sure this doesn’t happen to you?
It sounds overly simplistic, but the more savings and investments you have the less likely you’ll join the 49% who have to slash their retirement lifestyle. As Americans, we seem to have something in the DNA that pushes us to do the minimum. Retirement planning is not about surviving, it’s about thriving.
You’ve probably heard the old axiom that you need 80% of your preretirement income in retirement. Plan for 100%. You’ll have to deal with inflation, taxes and healthcare, things that a lot of people forget about when doing retirement planning. Your mortgage may be paid off when you retire, but the price of healthcare keeps going up and will likely take the place of that paid off mortgage. So, you can sacrifice now or you can sacrifice later. Which do you want to do?
Set your withdrawal rate
Before starting to take money out of your investments, you need to decide what’s appropriate for you. In the old days, withdrawing 4% was the norm when interest rates were higher, markets were less volatile and people didn’t live as long. Today interest rates are almost nonexistent, the market fluctuates like a yo-yo and it’s common for people to live into their 90’s.
Some questions to ask when determining your withdrawal rate should be:
- How much do I need to live the lifestyle I want?
- What are my sources of retirement income (which includes IRA RMDs)?
- How much will have to come from investments to make up the difference between lifestyle and income?
- How long will my investments last if I take that amount from the investment account?
- What is your family history of longevity?
Maximize Social Security benefits
You do this by waiting to claim Social Security benefits. Some people want to claim as soon as the’re eligible at age 62, and for some this might be the right decision because of health or family issues. But if you claim at 62 you will receive a permanently reduce benefit, not the full amount you’re entitled to at your full retirement age (FRA) which is generally between 66-67.
You can get an even bigger check if you wait until 70 to claim benefits. For ever year you wait to claim between your FRA and age 70, the amount you’ll receive goes. You may receive as much as 32% more if you wait until age 70. The increase is called delayed retirement credits.
You may want to wait until 70 to file for benefits if your health is good, you plan to continue working or you have a family history of living to a fine old age.
Don’t spend too much
Okay, another overly simplistic statement. But it applies. Do you intend to buy a lot of stuff after you retire? Will you have a lot of optional expenditures that will substantially draw down the value of your investments? Will your spending create a shorter life span for your investments than your own life span?
Making sure you don’t have to substantially cut spending after you retire is about asking all these questions and more. Best advice—find someone to help you plan and give you great advice. Make sure they’re a fiduciary with a legal and moral responsibility to truly help you—to do what’s right for you in every situation.