When Can I Retire
At the core of retirement planning are two questions: when can I retire? and how long will my investments last? In this article, we’ll come up with answers to the first question. Determining when you can retire is based on multiple factors: how much money you currently have invested for retirement, how much money you will spend each year of retirement, and how long you expect to live on your retirement savings.
The Chilling Effect of Debt
The best way to deal with debt is to get rid of it. The interest rate on unsecured debt will overwhelm even the best-performing investments, so get rid of unsecured debt before you do anything else. While debt reduction strategies are beyond the scope of this article, it is very important to get a handle on debt: where it comes from, how to stop adding to it, and how to eliminate it. It is very difficult to save money for retirement when you are dealing with serious debt, and in the event of a bankruptcy or debt action, certain types of investments can be garnished by creditors.
Even if you don’t have large amounts of debt, you should seriously take a look at your use of debt to finance purchases such as vehicles and home improvements. It is common to use these types of secured debt to afford big-ticket items that cannot be paid for with current income. However, retirees should be very careful with financing, as living on a fixed income can be precarious – a bad investment year can drastically affect portfolio values and lower annual income, making debt repayments burdensome. If possible, get into the habit of paying cash for large expenses to develop this discipline prior to retiring.
Mortgage debt is not counted in this category, as mortgage interest and depreciation can be used as a tax deduction. Owning your primary residence is also an excellent way to lower post-retirement expenses if you can pay off the mortgage prior to, or very soon after, retirement. Additionally, the sale of a home can defray assisted-living expenses or cover the cost of a smaller house.
Income During Retirement
For most retirees, monthly income derives from Social Security benefits and investment income. The Social Security Administration has several useful calculators designed to help you determine how much income you can expect during your retirement. By adjusting your annual income, income growth, and expected age of retirement, you can develop multiple income estimates to use in your retirement planning.
Most retirees will need to supplement their Social Security with investment income. Once you have an idea of how much Social Security income you can expect, you can estimate how much you will need to withdraw from your investments each month. Depending on how much you anticipate being able to save before retirement, you will know whether your investments can meet your needs.
Many retirees have chosen to supplement their income with part-time jobs and passive rental income. Buying a rental property can be a great way to supplement retirement income if you can do so early enough to pay off the mortgage prior to retiring. Rental properties can also require a great deal of work to rent and maintain, which may affect your retirement lifestyle. Getting a side job can be a great way to both earn some extra income and fill time. Many retirees choose to find part-time jobs outside their original career, while others use their years of career experience to find work in the field.
Retirement Savings: How Much is Enough?
Determining how much is enough is complicated; however, with some pencil work and a few financial calculators, some reasonable estimates can be made. Essentially, how much money you need saved at retirement can be determined by how long you plan to live on retirement income, what your monthly expenses are, how much you are currently contributing to your investments, and how much your investments will grow over time.
Let’s say that after drafting a retirement budget, you determine that your retirement expenses will be $4,500 per month in inflation-adjusted dollars. If you retire at age 65, and plan to live to age 90, you will need $924,360 saved at retirement. This calculation takes into account a 20% federal tax bracket, 7% annual investment growth, and 3% inflation.
If you’re currently age 45 and you already have $50,000 saved up, you’ll need to contribute $17,800 per year for the next 20 years to be able to retire at 65. Change just one of these variables, and the picture is different.
For example, let’s say you discover Aunt Agnes left you some money, and suddenly you have $100,000 saved. Now you only have to invest $13,000 per year to meet your retirement needs. To change a demand-side variable, let’s assume that you will have a post-retirement job that contributes $1,000 per month, lowering your monthly expenses to $3,500. Suddenly, you only need $754,548 to make it through retirement comfortably, which means you don’t need to contribute any additional money with Aunt Agnes’ windfall and only $13,700 per year without.
When it come to retirement planning, a straightforward question can have many different answers depending on your assumptions. It is well worth experimenting with different investment contribution amounts, growth rates, and retirement expense scenarios to see how your needs change.
If you are concerned that your investments may not last you through retirement or may not provide enough income, you have choices. By deferring retirement, you give your investments longer to grow while continuing to contribute. You can also choose a partial retirement, moving to part-time work or leaving your current career for another one. If you can lower your expenses enough to satisfy them with your current income, you can defer withdrawing from your investments until you feel confident they will last.
Market Forces During Retirement
There’s no doubt that market forces can have significant effects on your investment income and your overall investment performance. Many people who miss-time their retirement with a market downturn are forced to bite the bullet and delay to allow their investments to recover. While over the current economic climate may look up, market downturns happen every 5 to 7 years so it is likely that you will have to deal with them either at the start or just shortly after retirement.
The key to surviving a bad investment year is to reduce your investment withdrawals as much as possible and have enough liquidity available that you are not forced to sell out. By continuing to withdraw from investments that have lost significant value, you are essentially locking in the loss and damaging your investments’ ability to grow. Reducing your expenses to essentials only and developing alternate sources of income can help get you through the lean years.
Structuring your investments carefully is also key to hanging onto as much of your principle as possible. While it is important for retirees to include some growth-oriented investments in their portfolios in order to keep up with inflation, the overall structure of investments should be conservative, with asset preservation and income generation as their primary goals. While it is impossible to entirely remove financial and investment risk from a portfolio, steps to reduce risk can be taken.
Don't Put It Off, Jumpstart Your Retirement Plan Today
A comfortable retirement can only be secured with prudent planning, aggressive saving, and disciplined investing. Online research is a good start, but consider the benefits of discussing your options with a qualified financial advisor. The alternative could mean lost opportunities, higher fees, and lack of discipline. Request a free, no-obligation consultation today.Speak with an advisor over the phone about your retirement plan for FREE.