How much money do you need to retire? It’s a familiar question with an unsatisfying answer: it’s complicated. It depends on how much you’ve socked away, how much income you’ll have coming in, how much you plan on spending and how long you live. There’s no one size fits all, it’s unique to you. To find out if you’re ready to pull the trigger, take a shot at these questions:
What is your retirement income plan?
Your income plan should map out your inflows and outflows for the duration of your retirement. What are your sources of income? Will you receive a pension, social security or an annuity? Do they have cost of living adjustments? What will your expenses be in retirement? Should you plan on covering 100% of today’s expenses? How will inflation and taxes affect your plan? Do you have emergency cash set aside to cover 3-6 months of living expenses?
Where should your assets be invested?
Asset location is important as it impacts how your portfolio is taxed. A tax hierarchy can help you determine the best location for your investment assets. A rule of thumb, that may not be applicable to everyone, may be to: locate the most tax-inefficient investments in your IRA’s, tap your Roth for high-growth investments and utilize your individual (or joint) accounts for the most tax-efficient holdings, like tax-free municipal bonds and tax efficient exchange traded funds.
What should your retirement investment strategy be?
Your investment strategy depends on how much money you’ve saved for retirement, how much income you’ll be receiving and the amount you’re spending. It also depends on your age, and factoring in that you’re moving from an accumulation phase to a distribution phase of your life. A downturn in the markets when you first retire and start pulling money from your portfolio can have a large negative impact on the sustainability of your portfolio. It may be appropriate to reduce the level of risk in your portfolio for the first several years of your retirement, and then gradually increase your level of risk later on.
What’s your safe withdrawal rate?
That’s the amount of money you can pull out of your accounts each year, increased for inflation, and not run out of money. The 4% rule of thumb was developed for a 30-year retirement period and a moderate growth portfolio of stocks and bonds. Remember this is an estimate and your safe number may vary from the rule of thumb. It’s important to coordinate this number with your financial plan.
What accounts should you pull money from first?
If you have a variety of accounts, such as a traditional IRA, a ROTH IRA and an individual or joint account, the tax consequences of withdrawals from those accounts will vary. Some withdrawals are tax free, some are taxed as ordinary income, and some may be taxed as capital gains. You want to develop a distribution plan to minimize your overall taxes.
When should you start your Social Security benefits?
It depends upon your situation and whether you’re single or married. You’ll want to consider your health, family medical history and coordination with your overall financial plan. You can claim reduced benefits as early as 62 and delay benefits as late as 70. Benefits increase by roughly 8% a year, for each year you delay. Social Security is one benefit that you can’t outlive, so think of it as longevity insurance and look at the best strategy (or combination) to maximize your lifetime benefits.
Should you buy long-term care insurance?
It depends on your unique circumstances, your family medical history, and your net worth. Long-term care insurance covers activities of daily living at home, at assisted-living facilities and nursing homes. If you plan on self-insuring, you may consider structuring your portfolio so it can handle the impact of 3 or more years of nursing home care for each individual, increased by an inflationary factor of at least 6% a year. If you don’t have the investments to handle that event, then you may consider purchasing long-term care insurance, especially if you have a family medical history of Alzheimer’s or dementia.
What is your health care plan?
Health care coverage is a critical factor in a solid retirement plan. If you plan on retiring before age 65, you might consider the purchase of pre-Medicare coverage that may cost $600 or more per month per person. Three months before you turn 65, you are eligible to enroll in Medicare. Medicare Part A includes hospital coverage; Part B is for medical coverage for physician visits and other outpatient care; Part C is a plan combining coverage from Part A and B; Part D is prescription drug coverage. Medicare Part B pricing varies depending on your income and may range from $109 to $429 per month. Part D may range from $13-$75 per month. Post-retirement health coverage is complex and you may consider working with a health care insurance professional to design a medical plan that covers your specific needs.
As you can see, there are a wide variety of variables to planning a smooth retirement. Discuss these questions with your Wealth Manager and together you can determine if your retirement plan is on target.
