I saw this quote, "Goodbye Tension, Hello Pension" hanging on an old sign in a restaurant. Of course, today with pension plans fading out of the retirement income portfolio, it should now read, Goodbye Pension, Hello Tension. Now the responsibility for generating an income stream is on the retiree and with that comes much tension - evaluating fees, asset allocation, fixed annuities, Social Security, etc.
With financial security evaluation, and retirement planning as a major focus of my practice, I receive a lot of questions about retirement readiness. In the article below I address a few of the most typical questions.
|I would like to retire soon, what are the things that I should be considering?|
The single most important consideration when it comes to retirement preparation is if you have saved enough to maintain your desired retirement lifestyle for the rest of your life. Unfortunately, determining what is "enough" is very complex and depends on many more factors than just expected retirement spending.
What other factors are there to consider?
First, you must consider other cash inflows - beyond the portfolio. For example, you may have a $50,000 a year pension. If this pension is inflation-adjusted at 5% a year, versus a fixed pension, this can have a dramatic impact upon the actual amount of savings that needs to have occurred. Also, does the pension provide for survivor benefit and if so, in what amount. These factors, and many more, will strongly impact how much needs to have been saved. Having to account for all these factors, render rules of thumb (such as the 4% withdrawal rate rule) irrelevant very quickly. I prefer to call these rules, "rules of dumb".
Can you give me an example of how one of these complexities can impact planning for the future?
While it is relatively easy for most people to calculate their regular monthly expected retirement lifestyle, what people don't consider is how this lifestyle will change in the future. This is because people greatly underestimate the amount of change they will experience in the future. For example, if your plan is to move into a high cost CCRC (continuing care retirement community) this will require a very large one-time cash outflow at that point in the future - - plus larger ongoing expenses. In other words, it would be necessary to spend less now (earlier in the retirement years) in order to ensure that funds are available for these large expenditures in later retirement years. If you instead followed a rule of thumb such as the 4% rule, you might not have money for the move to the CCRC. These types of scenarios cannot be accounted for using rules of thumb or online retirement calculators. The situation may easily be reversed whereby you may need to take much larger savings withdrawal immediately (due to a decision to delay collecting Social Security) and therefore, smaller withdrawals in the future (since Social Security payments will be higher).
Other unanticipated or unaccounted for expenses include assisting children, your own medical needs, and large one-time capital expenditures such as home improvements, auto replacement, and emergencies.
Are there still other things to consider?
Absolutely. The most important considerations always revolve around the irrevocable decisions such as when to begin to take Social Security (and under what collection strategy), or when and how to take a pension. Both Social Security and most pension plans have a dizzying array of collection options. Decisions around selecting Social Security and/or a pension are very complex by themselves let alone once this decision is integrated within the context of a person's complete financial picture. Again these complexities cannot be illustrated or accounted for using rules of thumb or online retirement calculators. Even the most widely used financial planning software in my industry does not take detailed, year-by-year income tax calculations into account when doing retirement projections.
So, am I ready to retire?
I can only really answer that question once I have evaluated every aspect of your financial situation - income, pension, Social Security, spending, future medical, expected investment returns, asset allocation, debt, lifestyle spending in retirement, college funding, savings rates, current portfolio value, inflation, taxes, etc. And that can only be done with the right tools which can handle all of life's financial complexities. However, once done, you will have a very strong handle on your expected retirement age and lifestyle in retirement.
What if I have not saved enough? Then what is the best method of improving my situation?
First, do not attempt to play "catch-up" by increasing your portfolio risk. Also, while saving continues to be very important, saving just a bit more will not have the impact you would hope. Instead, there are two things you can do. First, is work longer. This has several benefits. Delaying retirement continues your employment income which allows you to delay (and therefore increase) your pension and Social Security. It also keeps your portfolio intact by eliminating investment withdrawals.
The second thing that has a major impact upon your situation is to reduce your lifestyle. This is not just in order to save more, but to adjust your spending habits back in line with your anticipated resources.