After working \u2013 and diligently saving \u2013 for decades, retirement is finally here. And with it, the opportunity to travel more, to spend more time on your hobbies, to spoil your grandchildren, or perhaps to volunteer more time to causes important to you.<\/p>\n
If you\u2019re like many new retirees, though, you may feel a bit of uncertainty about the transition from working career to retirement. You may be asking yourself, \u201cHave I saved enough for retirement?\u201d Or, \u201cHow should I invest once I\u2019m retired?\u201d Or, \u201cWhat risks can affect my retirement plans?\u201d These concerns are normal, and over the years the Springwater team has been helping clients plan for retirement, we\u2019ve heard them often. It\u2019s natural to wonder \u2013 or even worry a bit \u2013 whether you\u2019ve planned for everything.<\/p>\n
So, let\u2019s review four keys to a secure retirement. <\/p>\n
A foundation of every good retirement plan is a cashflow projection, or budget. Well before your retirement date arrives, you should have a clear idea of what you plan to spend on your core living expenses, as well as on variable or one-time expenditures. <\/p>\n
Your core living expenses are the costs that you\u2019re likely to incur every year in retirement. These would include spending on housing \u2013 like rent or a mortgage payment (if you still have a mortgage), utilities, various types of insurance, food and clothing, and so on. If you\u2019ve not yet done so, track these expenses for a few months and then extrapolate them to a full year.<\/p>\n
In addition to your core living expenses, you\u2019ll spend money on periodic or one-time purchases. These outlays would include periodic home maintenance, replacing your car(s) when they\u2019re ready, travel, and charitable giving, to name just a few. Start by estimating when you\u2019ll incur these expenses, and where possible attach a price tag to them. For example, you might plan to spend money on travel every year, on new cars once a decade, and on a new deck or roof for your home just once.<\/p>\n
Once you\u2019ve built a clear picture of your fixed and variable expenses, you should turn to calculating your income sources in retirement.<\/p>\n
Most of us will be able to claim a Social Security benefit in retirement, and those that can\u2019t will probably be entitled to a defined benefit pension that\u2019s at least as attractive. Social Security is an incredible program, in that it provides you with a guaranteed, inflation-adjusted stream of income that you can\u2019t outlive. If you calculated the present value<\/strong><\/a> of your projected Social Security benefit, you\u2019d be amazed at the value.<\/p>\n For most of us, Social Security will replace only about 30-40% of our pre-retirement income. So, you\u2019ll need other sources of income in retirement to ensure that you\u2019re able to cover your projected expenses.<\/p>\n You may be one of the lucky people who\u2019s entitled to receive a defined benefit pension<\/strong><\/a> at retirement, in addition to Social Security. Most likely, though, you\u2019re not, and so you\u2019ll need to have saved during your working years, with the goal of converting those savings into retirement income when you stop working. More on how much of your savings you can safely withdraw each year below.<\/p>\n The goal, of course, is to have your projected income in retirement exceed your expenses. If it does, you\u2019ve put yourself in position for a comfortable retirement. If it doesn\u2019t, you\u2019ll need to look at ways to reduce your expenses.<\/p>\n After you\u2019ve aligned your income and expenses, you should review your portfolio\u2019s investment mix, or asset allocation, to ensure that it\u2019s appropriate for your plan.<\/p>\n Let\u2019s say that you\u2019ve decided to retire at age 65, and that you\u2019ve managed to save $1 million for retirement across your various plans and accounts. How much can you safely withdraw from your portfolio, to supplement your Social Security benefit and possible pension income, and not have to worry about depleting your savings too soon?<\/p>\n There are a number of very important factors that play into the answer to this question. They include how long you plan to live, the investment rate of return on your portfolio, and the future inflation rate. Here, we\u2019ll focus on the impact of your asset allocation on the answer.<\/p>\n At Springwater, we often say to our clients that they \u201cshould take no more investment risk than is necessary to make [their] plan work\u201d. Why? Because when someone looks back on their life, they\u2019re unlikely to say, \u201cI\u2019m so glad I got a 6.5% return on my portfolio.\u201d But they are likely to appreciate the fact that they lived a happy and fulfilling life, and that they were able to do all the things they\u2019d wanted to.<\/p>\n So, you should create an investment mix for your portfolio that\u2019s likely to produce a return sufficient to allow the withdrawals you\u2019ll need for the goals you’ve defined.<\/p>\n Let\u2019s look again at our example, where you\u2019ve saved $1 million by age 65. Let\u2019s also assume that you plan to live another 30 years, to age 95. Finally, let\u2019s say that you want to withdraw $40,000 from your portfolio in your first year of retirement, and that you plan to increase that amount each year in the future, to keep up with inflation. Is this a realistic plan? Can you safely start off withdrawing 4% of your $1 million, and not run out of money before age 95?<\/p>\n Historically, a 4% withdrawal rate would have been considered fairly safe, with a few caveats. One of the most important caveats is that your portfolio would need to maintain a meaningful exposure to stocks. Meaningful here means somewhere in the range of 50-60% or so.<\/p>\n Today, the answer isn\u2019t so clear. One reason why is that returns on fixed income investments (like cash, CDs and bonds) are at or near historical lows. This means that some percentage of your portfolio will generate a negligible return. In the past, you could have expected a return of 3-5% or more on your fixed income. So, while owning bonds and cash still help reduce your portfolio\u2019s overall risk level, they don\u2019t currently produce much return.<\/p>\n Note also that increasing your allocation to stocks, say from 50% to 80% or more, doesn\u2019t automatically increase your \u201csafe withdrawal rate.\u201d This is because of something known as \u201csequence of returns\u201d risk<\/strong><\/a>. The higher your allocation to stocks, the more volatile your portfolio\u2019s returns from year to year. And if you get very bad returns early in retirement, your portfolio\u2019s value may decline so far that it doesn\u2019t recover.<\/p>\n Most financial advisors have sophisticated software that they can use to help you determine a \u201csafe withdrawal rate\u201d for your portfolio, given the asset allocation that\u2019s appropriate for you.<\/p>\n To paraphrase the poet Robert Burns, the best laid plans can go awry. Even if you\u2019ve accurately calculated your retirement income and expenses, and you\u2019ve got the right asset allocation in place to generate the additional income you\u2019ll need, there are still risks that could jeopardize your plan. Let\u2019s review a few of the biggest risks to your secure retirement.<\/p>\n By and large, we\u2019re living longer than ever before. And if you live a healthy lifestyle, the odds are that you\u2019ll live beyond your actuarial life expectancy.<\/p>\n That means that your savings will need to last longer, perhaps decades longer, than you planned for. How can you hedge against the risk of living longer than you originally planned?<\/p>\n First, remember that Social Security includes a cost of living adjustment<\/strong><\/a>, or COLA. The Social Security COLA is updated every year, and it’s intended to ensure that recipients\u2019 benefits more or less keep up with inflation.<\/p>\n If you think it\u2019s likely that you\u2019ll live longer than your actuarial life expectancy<\/strong><\/a>, you should strongly consider delaying your Social Security benefit beyond your Full Retirement Age<\/strong><\/a>, and possibly as long as to age 70. Your Social Security benefit goes up by 8% each year you wait to claim it after your Full Retirement Age. This means that your benefit at 70 is 24% higher than at age 67. Of course, if you retire before claiming your Social Security benefit, you\u2019ll need resources to live from before you claim your delayed benefit.<\/p>\n Defined benefit pensions are another great hedge against longevity, because most offer you a \u201clifetime\u201d benefit option at retirement. Not all defined benefit pensions offer a COLA to keep up with inflation, though, so if you have one you should clarify whether it does.<\/p>\n You can also look into converting some of your accumulated retirement savings into a lifetime stream of income, via an annuity. Research has shown that annuities can make a retirement plan stronger<\/strong><\/a>, particularly if longevity is a concern.<\/p>\n While we\u2019re generally living longer, we\u2019re not necessarily experiencing a high quality of life in those later years. This is particularly true for people who have a family history of needing care later in life, at home or in a facility.<\/p>\n In 2020, the cost of in-home care<\/strong><\/a> in Portland, Oregon was about $4,500 per month, and the cost of a semi-private room in a nursing home was about $7,800 per month. For Santa Cruz, California, these figures were $6,300 and $9,200 per month, respectively. In addition, these costs have been rising much faster than the overall rate of inflation for many years.<\/p>\n Assuming you don\u2019t have the resources available to pay for 24-36 months or more of care without jeopardizing the strength of your retirement plan, we\u2019ve found there are two good ways to hedge against the risk of needing care. They are long-term care insurance and a reverse mortgage.<\/p>\n Long-term care insurance helps pay for the care you need when you\u2019re unable to perform so-called activities of daily living. The long-term care insurance landscape has changed considerably over the past several years, and today\u2019s policies are different than those written in the 1990s and 2000s. You can find some very helpful information about long-term care insurance here<\/strong><\/a>.<\/p>\n Some people think that their risk of needing care is so small, or the period that they\u2019ll need it so short, that it doesn\u2019t make sense to buy LTC insurance. For them, a reverse mortgage can be a solution to access funds for care, without drawing down on their retirement savings. To learn more about how reverse mortgages work, and how you can use one to hedge against the risk of needing care later in life, watch this informative conversation<\/strong><\/a>.<\/p>\n If you\u2019ve been paying attention to the financial media lately, the topic du jour is inflation. After hovering between 0% and 1% for the better part of a decade, inflation has finally started to pick up. A strong economic recovery after the Coronavirus pandemic and unprecedented government spending to support the economy have meant that prices are rising faster than they have in some time.<\/p>\n Some inflation is good for an economy; in fact, most economists and central bankers worry much more about deflation than mild inflation. But inflation, generally speaking, erodes the purchasing power of your income and savings. How can you hedge against the possibility of inflation impacting your retirement plan?<\/p>\n First, remember that your Social Security benefit has a cost of living adjustment. So while some retirees do find that their Social Security COLA doesn\u2019t fully reflect the price increases they see on a daily basis, your benefit will be adjusted.<\/p>\n Also, you can buy US government bonds that offer a return that\u2019s adjusted for inflation. These include Treasury Inflation Protected Securities<\/strong><\/a>, or TIPS, and Series I bonds<\/strong><\/a>. You can compare TIPS and Series I bonds on the TreasuryDirect website<\/strong><\/a>.<\/p>\n Probably the easiest and most cost-effective way to ensure your retirement income keeps up with inflation is to ensure that you\u2019ve allocated enough of your portfolio to stocks so that you can safely increase your withdrawals. This means properly diversifying your portfolio within and across<\/em><\/strong> a broad range of asset classes, and maintaining a meaningful exposure to stocks. Keeping the bulk of your investments in bonds and cash, and planning to \u201clive off the interest and dividends\u201d, simply won\u2019t work in today\u2019s investment environment.<\/p>\n An important part of planning for a secure and comfortable retirement is estate planning. An estate plan is a comprehensive set of documents<\/strong><\/a> that include a will, an advance health care directive, a durable power of attorney, and, possibly, a revocable living trust.<\/p>\n Your will and your trust make clear your wishes for the distribution of your assets after you pass away. Your health directive and power of attorney allow you to appoint someone to make health- and finance-related decisions on your behalf, if you\u2019re unable to.<\/p>\n While there are most certainly financial aspects to (not) having your estate plan in place, it\u2019s arguably more about the peace of mind that the documents provide. And peace of mind is a hugely important part of a comfortable and secure retirement.<\/p>\n If you need help planning and investing for a secure and comfortable retirement, consider working with a Certified Financial Planner<\/strong><\/a>\u2122 (CFP\u00ae). Advisors who hold this designation have met rigorous educational, experience and ethics requirements.<\/p>\n <\/p>\n","protected":false},"excerpt":{"rendered":" After working \u2013 and diligently saving \u2013 for decades, retirement is finally here. And with it, the opportunity to travel more, to spend more time on your hobbies, to spoil your grandchildren, or perhaps to volunteer more time to causes important to you. If you\u2019re like many new retirees, though, you may feel a bit […]<\/p>\n","protected":false},"author":2,"featured_media":6646,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_et_pb_use_builder":"","_et_pb_old_content":"","_et_gb_content_width":"","_mi_skip_tracking":false,"footnotes":""},"categories":[3,5,152,11],"tags":[21,59,66,86,107,118,126,140],"aioseo_notices":[],"_links":{"self":[{"href":"https:\/\/springwaterwealth.com\/wp-json\/wp\/v2\/posts\/6645"}],"collection":[{"href":"https:\/\/springwaterwealth.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/springwaterwealth.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/springwaterwealth.com\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/springwaterwealth.com\/wp-json\/wp\/v2\/comments?post=6645"}],"version-history":[{"count":0,"href":"https:\/\/springwaterwealth.com\/wp-json\/wp\/v2\/posts\/6645\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/springwaterwealth.com\/wp-json\/wp\/v2\/media\/6646"}],"wp:attachment":[{"href":"https:\/\/springwaterwealth.com\/wp-json\/wp\/v2\/media?parent=6645"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/springwaterwealth.com\/wp-json\/wp\/v2\/categories?post=6645"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/springwaterwealth.com\/wp-json\/wp\/v2\/tags?post=6645"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}2 | Get Your Asset Allocation Right<\/strong><\/h2>\n
3 | Hedge Against Big Risks<\/strong><\/h2>\n
Longevity<\/strong><\/h3>\n
Needing Care<\/strong><\/h3>\n
Inflation<\/h3>\n
4 | Estate Planning<\/strong><\/h2>\n
Looking for Guidance?<\/strong><\/h2>\n
If you\u2019re looking for help with your retirement plan, contact us today to see how our team at Springwater Wealth can help you.<\/strong><\/a><\/span><\/h2>\n