Not having a paycheck anymore can be scary, no matter the reason. When we talk with clients about their concerns in retirement, the loss of a steady and consistent paycheck is top of their list. However, there are ways to plan for life in retirement that will greatly reduce this anxiety. One of the most essential, but often over looked, is determining how much income you will need once you’ve retired. Predicting a specific amount can be challenging, but one way to make it a lot simpler is to retire debt free because debt payments greatly impact cash flow. We write about the importance of debt-free retirement in other blogs and discuss it on our weekly podcasts because we feel it is the key factor for maintaining peace of mind once you’ve retired. However, once that first step is taken care of, there are several other ways to plan for life in retirement.
A crucial next step is to discuss your goals for life in retirement. What type of lifestyle do you want to have after you stop working? Some retirees will want to live modestly while others will want to travel and maintain an active lifestyle. This is the first consideration when thinking about how much you need to save for your golden years. Will Social Security and a small nest egg cover your lifestyle or will you need more money to accomplish all your saved up plans?
Typically, monthly expenditures during retirement are more variable than during working years. Many new retirees enter retirement by traveling and being on the go. We call these the "go-go" years. During this time, retirees are spending more and monthly expenses vary widely. As we age and move out of the "go-go" years, we tend to slow down and spend less, but this does not mean the need for income lessens. At the end of life, living expense spending typically decreases while we see significant peaks in rising health care costs. All of these phases should be taken into consideration when determining how much you will need to save in retirement funds.
Once those expenses are determined, look at where income can come from to replace your paycheck. Typical sources are 401ks, IRAs, Roth IRAs, brokerage accounts, pensions (for some), rental income, part time work and, eventually, social security. It is important to optimize where the income comes from for tax purposes and max benefit reasons. You will most likely want to take out the maximum benefit to meet your needs, while minimizing taxes and not running out of funds before you are 95 years old. We use financial planning software that simultaneously combines all these factors to help us optimize retirement income for our clients.
The next question to ask is "How much income can your portfolio generate in retirement?" During retirement, we no longer look at the portfolio as a growth engine, but as a way to pay out income. As a rule of thumb, we recommend your portfolio be able to pay out 4% per year. The key is to create a portfolio with a return stream that can match the expenditures of the retiree and handle inflation each year. We recommend retired clients have a cash bucket within the portfolio that covers expenses for two to three years.
Planning for retirement can feel daunting, but a well thought out plan can help you save on stress later. If you have any questions about retirement planning or would like to discuss your current financial picture, please don’t hesitate to contact us here at Wiser Wealth Management.
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Matthews Barnett, CFP®, ChFC®, CLU®