Your Financial Future: Planning for retirement
As people start planning for retirement, there are a number of decisions that they must make. One of the first steps is deciding what ideal retirement will look like. Many boomers have a different goal than their parents had. Merrill Lynch surveyed affluent boomers between the ages of 46 and 64. A large majority expected a more active lifestyle, a different look and a higher standard of living. About 70% planned to keep working and 20% expected to start or further their own businesses. Most that have success running a business in retirement were already doing so before retirement. There is a huge failure rate in new business startups.
There are some gender expectation differences, as the survey found more women hoping to travel, pursue a hobby, be involved in community and charity work. More men thought of starting or furthering a business. Some goals and hobbies require a larger monetary commitment than others. Other decisions such as where to live might be up for consideration. This can be influenced by family location, cost of living and climate conditions. Taxes can be another influencing factor.
Once you have a picture of what retirement will look like, you need to determine the monthly income needed to support it. Once you have these totals, you need to compare with what sources of income will be coming in. This might be from Social Security and pensions. If these two fixed income sources cover all of your expected cash needs, you are probably in good shape. Often, there is a shortfall. This gap must be made up from other sources.
Some might come from investments such as 401(k)s, IRAs or brokerage accounts. You may have a Roth IRA. It is important to take money from the right accounts to minimize taxes so that you have more to spend on your needs and desires. You may have rental income, royalties or may plan to work part time. By factoring in any of these sources, see if your income gap is covered. If not, you may have to consider some adjustments to your desired retirement. Make sure you plan for inflation protection. Many people use 3% for their plans. Without this element, your purchasing power will slowly erode away.
There are three main risks in retirement. First is longevity risk. That is the possibility of running out of money. Unless you come from a family with very short life expectancy or are current very ill, you should provably plan on living until age 95. With modern medicine and improved environmental conditions, centurions are one of the fastest growing segments in our society.
The second major risk is market risk. If the market crashes right before or soon after retirement starts, you could get wiped out in your investment accounts. This sequence of risk can be a death blow. If you need to start taking money out of your retirement accounts to live on, the balance can become depleted in a hurry if the market corrects. When you are young and working the order of returns does not matter, but during distribution it can be the difference between an enjoyable retirement or not.
The third major risk is taxes. FINRA identified this as being the largest risk to your retirement. Proactive tax planning is necessary to reduce your overall tax burden. Future tax rates will have to increase significantly to pay for all of the government spending on COVID-19. Do a comprehensive review of your financial positions a few years before retirement to make sure that you are ready. This will help to eliminate many of the surprises.
Your Financial Future is written by certified financial planner Gary W. Boatman, MBA and CFP, who also wrote the book, “Your Financial Compass: Safe Passage Through The Turbulent Waters of Taxes, Income Planning and Market Volatility.” If there is an area that you would like to see discussed in the column, send your suggestions to gary@BoatmanWealthManagement.com.