Tag Archives: Income Planning

Retirement Income: Estimating How Much You Will Need

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Use your current income as a starting point

You have probably read financial press articles that discuss desired annual retirement income as a percentage of your current income. Depending on the article, that percentage could be anywhere from 60 to 90 percent, or even more. The appeal of this approach lies in its simplicity, and the fact that there’s a fairly common-sense analysis underlying it: Your current income sustains your present lifestyle, so taking that income and reducing it by a specific percentage to reflect the fact that there will be certain expenses you’ll no longer be liable for (e.g., costs associated with working such as lunches out, dry cleaning, commuting, etc.) will, theoretically, allow you to sustain your current lifestyle.

The problem with this approach is that it doesn’t account for your specific situation. If you intend to travel extensively in retirement, for example, you might easily need 100 percent (or more) of your current income to get by. It’s fine to use a percentage of your current income as a benchmark, but it’s worth going through all of your current expenses in detail, and really thinking about how those expenses will change over time as you transition into retirement.

Project you retirement expenses

Your annual income during retirement should be enough (or more than enough) to meet your retirement expenses. That’s why estimating those expenses is a big piece of the retirement planning puzzle. But you may have a hard time identifying all of your expenses and projecting how much you’ll be spending in each area, especially if retirement is still far off. To help you get started, here are some common retirement expenses:

  • Food
  • Housing: Rent or mortgage payments, property taxes, homeowners insurance, HOA fees, property upkeep and repairs
  • Utilities: Gas, electric, water, telephone, cell phone, Internet, cable TV, trash
  • Transportation: Car purchases or payments, auto insurance, gas, maintenance and repairs, public transportation
  • Insurance: Medical, Medicare Supplement, dental, life, long-term care
  • Health-care costs not covered by insurance: Deductibles, co-payments, prescription drugs
  • Care for yourself, your parents, or others: Costs for a nursing home, home health aide, or other type of assisted living
  • Taxes: Federal and state income tax, capital gains tax, personal property tax
  • Travel: for fun, to visit family, to go to family events such as weddings and funerals
  • Clothing
  • Debts: Personal loans, business loans, credit card payments
  • Education: Children’s or grandchildren’s college expenses
  • Gifts: Charitable and personal such as Christmas, birthday, wedding
  • Recreation: dining out, hobbies, leisure activities, season tickets to sports or entertainment
  • Miscellaneous: Personal grooming, pets, club memberships, household items

Don’t forget that the cost of living will go up over time. The average annual rate of inflation over the past 20 years has been approximately 2.3 percent. (Source: Consumer price index (CPI-U) data published by the U.S. Department of Labor, January 2015.) And keep in mind that your retirement expenses may change from year to year. For example, you may pay off your home mortgage or your children’s education early in retirement. Other expenses, such as health care and insurance, will increase as you age. To protect against these variables, build a comfortable cushion into your estimates (it’s always best to be conservative). Keep in mind that some expenses have historically gone up at a rate greater than inflation.  For example, in our retirement projections we inflate healthcare expenses at a rate of 6%.

Decide when you will retire

To determine your total retirement needs, you can’t just estimate how much annual income you need. You also have to estimate how long you’ll be retired. Why? The longer your retirement, the more years of income you’ll need to fund it. The length of your retirement will depend partly on when you plan to retire. This important decision typically revolves around your personal goals and financial situation. For example, you may see yourself retiring at 50 to get the most out of your retirement. Maybe a booming stock market or a generous early retirement package will make that possible. Although it’s great to have the flexibility to choose when you’ll retire, it’s important to remember that retiring at 50 will end up costing you a lot more than retiring at 65.

Estimate your life expectancy

The age at which you retire isn’t the only factor that determines how long you’ll be retired. The other important factor is your lifespan. We all hope to live to an old age, but a longer life means that you’ll have even more years of retirement to fund. You may even run the risk of outliving your savings and other income sources. To guard against that risk, you’ll need to estimate your life expectancy. You can use government statistics, life insurance tables, or a life expectancy calculator to get a reasonable estimate of how long you’ll live. Experts base these estimates on your age, gender, race, health, lifestyle, occupation, and family history. But remember, these are just estimates. There’s no way to predict how long you’ll actually live, but with life expectancies on the rise, it’s probably best to assume you’ll live longer than you expect.

Identify your sources of retirement income

Once you have an idea of your retirement income needs, your next step is to assess how prepared you are to meet those needs. In other words, what sources of retirement income will be available to you? Your employer may offer a traditional pension that will pay you monthly benefits. In addition, you can likely count on Social Security to provide a portion of your retirement income. To get an estimate of your Social Security benefits, visit the Social Security Administration website (www.ssa.gov). Additional sources of retirement income may include a 401(k) or other retirement plan, IRAs, annuities, and other investments. The amount of income you receive from those sources will depend on the amount you invest, the rate of investment return, and other factors. Finally, if you plan to work during retirement, your job earnings will be another source of income.

Make up any income shortfall

If you’re lucky, your expected income sources will be more than enough to fund even a lengthy retirement. But what if it looks like you’ll come up short? Don’t panic–there are probably steps that you can take to bridge the gap. We can help you figure out the best ways to do that, but here are a few suggestions:

  • Try to cut current expenses now so you’ll have more money to save for retirement
  • Consider delaying your retirement for a few years (or longer)
  • Lower your expectations for retirement so you won’t need as much money (no beach house on the Riviera, for example)
  • Work part-time during retirement for extra income

The best way to determine if you are on track for the retirement you envision, is to get started now on a financial plan. You don’t have to go it alone; you can enlist the help of a professional.  Contact us today.

Based on an article Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2016

 

Garrett Planning Network Retreat 2016

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I was recently out of the St. Louis area for a bit while I attended The Garrett Planning Network 16th Annual Retreat which was held in Denver, Colorado. I am a member of the Garrett Planning Network which is an international  group of financial planners that offer planning and investment advice on an hourly basis.  Each member owns their own firm. I have written about the Garrett Planning Network before.  This was the eighth year I have gone.

I attended the conference and earned continuing education credits by going to various educational programs, which I need so that I can keep my designations and licenses such as:

  • CERTIFIED FINANCIAL PLANNER™
  • NAPFA Registered Financial Advisor
  • CHARTERED RETIREMENT PLANNING COUNSELOR℠

During the four day conference I attended various educational programs such as:

  • Behavioral Finance: Psychology and Economics in Investing
  • Reverse Mortgages in Retirement Income Planning
  • Planning Costs Related to Caregiving
  • Fiduciary Best Practices for Registered Investment Advisor Owners
  • And others

Noted author William Bernstein, a bit of a rock star in our industry, gave one of the Keynote addresses titled “What the Liberal Arts Have to Teach Us about Finance.”  He talked about the difficulty of forecasting, and characteristics of good forecasters.  He discussed economic history; not the usual economic history going back to the market crash of the 20s, or even the tulip bulb bubble.  But economic history going back to biblical times and what conclusions can be drawn from such “longitudinal studies.”

Allan Roth, another well known author and fellow financial advisor delivered the Keynote address “Behavioral Finance: Psychology and Economics in Investing”, wonderfully telling it like it is in his typical style.  He shared financial decision making biases that negatively impact consumers and advisors alike based on academic research and personal observation.

You can see some of the live tweeting that I did at the conference under my Twitter handle @HourlyPlanner.  You do not need a Twitter account.

The Garrett Planning Network, has dozens of conference calls throughout the year, and the members interact on an internal forum to help each other with more complex planning cases on a daily basis.  One of the most beneficial outcomes of my annual trip to this retreat, is getting together with this group, sharing ideas, and getting updates from these amazing colleagues in person.  I am already looking forward to next year!

Retirement Planning: When You Haven’t Tracked Your Spending

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Planning for retirement is not a subject you dwell on every day until you realize it’s closer than you think. However, there are various components for you to consider when planning for your “golden years.” An important piece of this planning requires you to calculate your current spending so you can make wise financial decisions for your retirement years.

How much do you spend?

Some families track their spending using software, online tools, a homemade spreadsheet, or simple paper and pencil. If you have been tracking your spending, congratulations! You have some solid spending history to use when estimating how much you will need to spend each year to pay your bills and do the things you want to do to enjoy your retirement.

What if you do not track your spending?

Many families that are easily able to pay their bills and accumulate healthy balances in their savings and investment accounts have never felt the need to track their spending. However, as they get within a few years of retirement they realize they do not have any spending history to use for projecting whether they can afford to retire soon. They do not know if their investments will provide enough income to support them with the same lifestyle they have always enjoyed. Fortunately there is a solution.

How to calculate your current spending?

Before you decide to turn off your income from employment, you want to be confident that you know how much money you need for retirement. What you don’t want to do is not have enough income at the time of retirement to provide for you and your loved one. Therefore, it is best to use pure facts when calculating your current spending.

  1. You make A.
  2. You give B to the government for taxes.
  3. You save C.

The rest is what you spend.

A – B – C = what you spend

It’s that simple. Don’t let the fact that you have not been tracking your spending delay your retirement planning. You can use this simple calculation to estimate how much you spend currently. And track your spending going forward so that you can more accurately estimate your spending needs in retirement.

Tracking your monthly spending today is important to do in the last few years before retirement. If you haven’t started, it’s okay. Start now. When you have an accurate picture of your expenses today, you’ll be better off in your future.

 

 

Social Security Cost of Living Adjustment for 2013

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If you receive monthly Social Security and Supplemental Security Income benefits your benefits will increase 1.7% beginning in January 2013.

Cost of Living Adjustment

The cost of living adjustment (COLA) is made annually.  Sometimes there is no increase as we saw in 2010 and 2011, and sometimes it is as high as 14.3% which we saw in the 1980’s during the high inflation years.  The COLA for 2012 was 3.6%.

No More Paper Checks

Another change for 2013, for those receiving Social Security benefits, is that paper checks are being phased out by March 1, 2013.  In my first job out of college I worked at a bank, while I did not work in the lobby, I walked past the lobby to get to the elevators on the way to my office.  I remember that the lobby was always packed on the third day of the month, because Social Security checks were hitting mailboxes and customers would bringing them in to deposit them.  That was many years ago, I’m sure that isn’t the case anymore.  However, the estimate is that the government is going to save $120 million dollars per year when they stop mailing paper checks. So there are many people that still get paper checks, and there will be a cost savings to moving people to direct deposit.  If you get paper checks, be aware that you must sign up for direct deposit very soon.

Maximum Earnings Subject to Social Security Tax

For those of you still working, the maximum amount of earnings subject to the Social Security tax has been increased from $110,100 to $113,700.

Retirement Planning: What do I need to know about my pension plan?

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When you retire, your paychecks will stop.

But you want to have fun.  You have been putting off so many things, thinking “When I retire, I am going to {fill in the blank with that thing you really want to do, but have to put off until you have more time }”.   How will you pay for retirement if you are not getting a paycheck?

That is where retirement planning comes in.

The idea is to make sure that the nest egg you have accumulated, plus income from sources like Social Security and pensions will be able to pay for your expenses in retirement.

I have written about expenses to consider in retirement.  If you are fortunate enough to have a pension, let’s look at a few tips to help you when gathering information about your pension to prepare for retirement planning.

Where to find information about your pension

Information can be found in the Summary Plan Description for your pension.  It can usually be found on the website for your pension or from your human resources department.  Or if you are in a union, talk with your union representative.

What kind of plan is it?

Is this a pension or a cash-balance plan?  A pension is not portable, if you leave your employer then the pension will stay with the employer until you are of retirement age.  If it is a cash-balance plan and you leave, it is portable; you may keep it with the employer, or roll it into an IRA.  There are other differences as well.  Consult your Summary Plan Description for the details of your plan.

Important ages or milestones for your pension

Knowing what ages or milestones are significant for your plan may impact your decision about when to retire.  Keep in mind this could also be a combination of your age and years of service.

  • Find out the age at which you become fully vested in your pension.  Vesting means that you keep contributions made on your behalf by your employer.
  • Find out the earliest age at which you could retire with a pension.
  • Find out the age at which you get your full benefit, any benefit taken before that age will be a reduced benefit.

How can you get your money?

Each plan has different options.  Find out what your plan offers.  Can you get a lump sum?  Can you take a partial lump sum and the rest in monthly payments for the rest of your life?  Does your plan offer a survivor option so that if you pass away, your spouse will still receive an income?

Is there a Cost of Living Adjustment?

A Cost of Living Adjustment, or COLA, would mean that the monthly payment would go up each year to adjust for inflation.   This is an unusual benefit, most employers do not offer this on their pension plans.  Many union plans do.  The Missouri Teacher’s pension is an example of a pension that has a COLA.  If your pension has a COLA, find out how yours works.

How much money can you expect?

This is the fun part of the information gathering exercise; finding out the estimate of how much money you would get at retirement.  There is usually a website where you can run pension benefit estimates, if not then talk with your human resources department or union representative.  Find out pension benefit estimates for the age at which you would like to retire and the age at which you get the full benefit.   Also look at other ages so that you can compare the amounts based on different retirement ages.

Does your pension plan set a maximum benefit?

What does it take to max out the pension?  Can you buy credits to increase your pension payment?

Investing time now in understanding your pension will reap rewards in retirement, allowing you to make the most of your benefit.