So, you’ve been working hard and saving well for all of your professional life and are now on the threshold of retirement. Needless to say, the time for you now is to actually enjoy all that you’ve wanted to do so far.
Before you jump on the retirement bandwagon, however, you must ensure that your savings and post-retirement earnings are enough to last for the rest of your life – all while factoring the ups and downs of the market, unprecedented expenses, inflation, and of course, longevity.
However, it’s not as daunting as it may sound at the moment. By remembering the following key factors when making your post-retirement income strategy, you can make your life a smooth and easy one – with no worries of having to come out of retirement to earn. Ever.
Thanks to advancement in science and technology, the mortality rates have down a lot. This makes it quite likely for healthy 65-year-olds today to live until their 90s – or at least their 80s. And if one goes by currently available data, longevity expectations will only serve to increase in the coming future.
This implies that the possibility of people living for 30 years or more after retirement is pretty commonplace. And that needs an equal amount of income to boot. If you do not plan out your strategy thoughtfully, you may just end up outliving your savings and having to come out of retirement, or worse, living on Social Security as a source of income (Given that the average Social Security benefit is around $1,296 a month, one can say that it isn’t enough to cover all needs).
Just because the current rate of inflation is low, doesn’t mean that it won’t fluctuate. Even if it doesn’t, it will surely have a powerful impact over a long time – say, 20-30 years. This can – and does – have a profound effect on retirees, who unlike their younger, working counterparts do not have the option of relying on raises and incentives.
A lower rate of inflation too can have a profound impact on the purchasing power of a retiree. For instance, an inflation rate of 2% would turn what is $50,000 today into $30,477 25 years from now. Looking at this in another way, if you bought something by spending $50,000 today, you would have to shell out $82,030 to purchase the same thing 25 years from now. It is therefore important that you make your plans early and put into factor the effects of inflation in order to be able to maintain your current lifestyle.
#3: Market volatility
Ups and downs of the market can be extremely unsettling when a retiree who is banking upon living comfortably on a fixed amount for the rest of your life. No matter what the circumstances you will need stocks for growth potential, both when you’re saving for retirement and when you have actually retired. By default, the assets you have should be able to last you a minimum of 30 years.
#4: The Amount of Money Withdrawn
Now this one is a no-brainer – no matter how inflation- or market-proof your savings are, they won’t last long if you draw too much. On the other hand drawing too little (mostly out of fear of your savings diminishing) will have an adverse effect on your lifestyle and psychology.
A sound retirement income plan includes recommendations on the amount of money that you can safely withdraw from your savings and still have the confidence in the fact that you won’t run out of money. Believe it or not, planning in this area (or lack thereof) can have a dramatic effect on how long your assets will last.
Elements of a Sound Retirement Income Plan
Now that you know the factors you must consider when preparing a retirement income plan, you should know the various important elements that make a good one.
The following are the basics of a sound income plan for retirement:
#1: Guaranteed income that will take care of daily expenses
The first thing your plan should fully cover is your daily expenses. This covers all the non-negotiable requirements that you have as a human being housing, clothes, food, health care and utilities. Not only should this income be able to last for the rest of your lifetime (30 years or more), it should have sources of income that are stable and do not easily get swayed by external factors.
Generally, there are 3 main sources of guaranteed income:
– Social Security: For most, this acts as a base of income post-retirement. When and how you take money from here has a profound impact on your retirement. While it may be tempting to start taking the money the moment you are eligible (generally at 62 years of age), it can prove to be costly later. Starting at 62 instead of waiting till you reach full retirement age (FRA) will lead to reduced monthly benefits.
– Pensions: While pensions were very common in the past, that is no longer the case. In fact, the U.S. Department of Labor says that only 14% workers today have a proper pension plan to speak of. In the event that you fall among them, you must decide on how you would like to draw the money – as a monthly payment or as a lump sum. In case you are not among the 14%, you can follow certain paths that will allow you to make a pension-like stream of income.
– Annuities: Basically, an annuity is a contract made with an insurance company that pays you a set income in return for an up-front investment that you made. This payment can either be made over the rest of your life or over a set period of time, and is unaffected by market upheavals. Fixed income annuities are of several types, such as a deferred income annuity, immediate income annuity, and fixed deferred annuity with a guaranteed lifetime withdrawal benefit (GLWB).
#2: Growth potential that can fulfill long-term requirements
Aside from the daily, non-negotiable expenses, you will also have other expenses that will cater to your hobbies and dreams (for which you will have time) – such as pursuing a new hobby or going on a vacation or buying a boat. When you construct your income plan, you must make sure that it includes investments that have a potential to grow and try to keep up with the rates of inflation and meet these demands. A good practice in this regard is to use your investment portfolio and pay for these discretionary expenses. That way, you could easily cut back in case the market suffered a sudden downfall.
Having a mixed bag of cash, bonds and stocks, that work according to your frame of time, financial position, and market tolerance is a very good place to start. You must execute your strategy carefully though, because while a conservative strategy will lead you to miss out on the growth potential of stocks in the long-term, a plan that is too aggressive may lead to you taking far too many undue risks – which could prove very costly when the market becomes volatile.
#3: Flexibility that can help you refine your plan with the passage of time as much as possible
Quite obviously, the more flexible your plan is, the better it will perform. As a rule of thumb, your plan must be able to adapt to any curveballs it may get. Plenty of things in can happen after you retire – both good and bad – while you may get an inheritance, you may also experience a sudden medical emergency or have your parents move in. If and when such things happen, you must have a plan in place that can cushion you against the financial hardships that you will have to suffer otherwise.
One good practice that helps in this regard is to have income from different sources. Not only will this create a more diversified stream of income during retirement, it will also help you protect yourself against some very important risks like longevity, emergencies, inflation, and fluctuations.
Take for instance, a plan that includes a combination of taking withdrawals and income annuities. While the former is not guaranteed to stay for life, it does offer the chance to control how much money you can withdraw each month. The downside to this is that the money might just run out if you draw too much, live a long life or if the market hits a sudden low. Income annuities, on the other hands are not flexible and have very little potential to grow, but act as a guaranteed source income that will stay for life
It’s a given fact that everyone’s situation – both financial and social is unique, and there is no “one foolproof income strategy” that will suit the requirements of all investors. You must therefore, identify your own situation and requirements, determine the need of growth potential, and then plan a strategy that will best suit your life as a retiree.
To make things easier, you can try following these six easy steps to create a basic yet strong income plan that will serve you well once your retire – and will last as long as you live:
Step #1: Study your lifestyle and situation and make financial as well as personal goals
Step #2: Plan a basic retirement income strategy in order to determine how long your current savings will last, and how you can successfully extend this period while maintaining your lifestyle
Step #3: Determine the following factors
– When you should take the help of Social Security
– The portion of your investment portfolio that you want allocated to a contingency fund, protection, and growth potential
– How your investment portfolio will be managed and who will do the managing
Step #4: Execute your strategy with the right combination of savings and income-producing investments, which will serve to balance your investment priorities and financial requirements
Step #5: Review your savings and investments regularly with an investment professional and always make an effort to refine your portfolio so that to suit your personal and financial requirements.
Step #6: Don’t forget to enjoy your retirement and live your dreams!