That doesn't sound like a very good answer, but it isn’t as bad of an answer as you might think.
Many couples and individuals preparing for retirement understand and appreciate that they have to build a budget for retirement. But with so many different variables, it can be hard to predict if your money will really last and if you will be able to afford the budget that you built for yourself. So even if the answer is “probably”, that can help establish some peace of mind.
The process of budgeting for retirement and planning how to spend down retirement savings can be daunting. So, here are a few suggestions to help you take control of the process, maintain the lifestyle that you’ll establish for yourself and enjoy financial security.
First, I strongly recommend to my clients that they spend a year “practicing” or “test driving” various budgets and lifestyles to ensure that they really know what they are signing up for. Many retirement planning tools use 70% or even 60% of pre-retirement income as the planned level of spending in retirement. That might be realistic for some, but maybe not. And while using such a low number in the planning process will help ensure your retirement assets last longer, it may not be sufficient to support other goals and ambitions you have for retirement. The longer you can sustain and feel comfortable with lower levels of spending, the more confident you can be using them in retirement planning tools.
Second, speaking of planning, as you sit down with an advisor or endeavor to plan out your retirement finances on your own, be sure that the tool you are using is enabled for Monte Carlo simulations. Rather than giving you a point estimate, Monte Carlo gives you a range of outcomes and will give you the probability that your retirement assets will last. Be sure the tool uses your level of spending and risk in your portfolio as inputs. No one knows exactly what’s going to happen in the investment markets. But what if today starts the worst 15-year stock market stretch in history? Will your assets last? Monte Carlo can help answer that question, and less dire scenarios too.
Third, once you have a comfortable level of spending and have found a great tool to analyze everything, take a big step back and make sure that those budget expectations are reasonable.
Two areas in particular: Many couples find that they have underestimated their medical expenses and medical insurance costs. Fidelity Investments estimates that a couple aged 65, retiring today will need $260,000 to cover health care costs in retirement. Is that what you’ve budgeted?
The other big area that is sometimes overlooked is inflation. The cost of everything you buy is going to go up over time and your income may not keep pace. It’s important to account for and factor in some level of increasing costs so you can maintain your lifestyle.
Fourth and lastly, consider the potential role of annuities in your portfolio. As a fee only, fiduciary advisor, we do not sell or promote any products on commission, including annuities. We always work in the best interests of our clients. Given the low assumed interest rate most annuity providers use and the ability to achieve similar results at a lower cost, we generally don’t recommend annuities. However, what happens if you go through all this planning and budgeting and build a fantastic plan that shows a high likelihood of your assets not running out based on the life expectancy of you and your spouse? Well, that’s a great start, but if you are given the gift of a long life? Don’t you want to make sure you have enough money to last as long as you live? If you plan for a normal life expectancy and live longer than expected, you may be exposed to some risk. A longevity annuity that kicks in after say age 85 is a good way to help protect your lifestyle in those very golden years.
Those four pre-retirement focus areas certainly aren’t comprehensive and every individual has circumstances that are unique to their situation that need to be planned around and accounted for. From Social Security claiming strategies to Long Term Care insurance, to Donor Advised Funds for charitable giving, there is a lot to consider. There are also so many different tools and calculators on-line out there that trying to sort it all out can be overwhelming. So take it slow and tackle on issue at and time.
If you have questions on any aspect of your retirement budget or pre-retirement financial planning or would like suggestions on the tools we use and recommend, just reach out, we’d be happy to help.
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