Before you plan financially for retirement, you have to envision what retirement will mean for you. Take some time and really visualize what you want. Try answering these questions:
If you had more time, (not money) what would you do with it?
Go on take a couple of minutes and write down your thoughts on a piece of paper. If you’re talented enough to sketch it, go ahead and do it now. If you have photos in magazines of activities you enjoy, cut them out and paste on a piece of paper. Be sure to make this realistic – if you can afford to do it now, you can probably afford to do it in retirement as long as you are diligent in saving for it.
Chances are, your retirement will incorporate some of the things you’ve just envisioned and make you happy. This exercise is important because once you have an idea or picture of what lies ahead in retirement, you have more incentive to save for it.
In a nutshell, planning for your retirement goals seem easy. However, I oftentimes hear from people on the verge of retirement that it’s truly scary to think about spending money and no longer saving for the future. Retirees who have done a good job saving find it hard to change their thinking from saving everything to spending it. Funny isn’t it? In retirement it’s easier to save money than it is to spend it. You have to get it right. There are no do-overs if you run out of money before you run out of breath.
Understanding how much money you’ll need to retire and live comfortably for the remainder of your life isn’t as easy as calculating your monthly bills. Many books have been written on the topic. One of my favorites is The Number by Lee Eisenberg; it encourages readers to think beyond a specific number goal they will need, and more about the lifestyle that will make them happy. But later on in the golden years comes uncertainty, when our health declines.
Whether we like to admit it or not, our health, both physically and mentally, spiral downward. We all face the inevitable. There are expenses that can’t be calculated or foreseen. However, other expenses such as your goals can be projected. Your retirement savings will vary depending on lifestyle and career choices made during your working years. Invest in time and plan wisely.
Instead of asking the question how much do I need to save for retirement, the question ought to be: What is a reasonable rate of withdrawal for me to never outlive my money? Once you understand how much you can withdrawal from your savings per year, you’ll have an easier time figuring when you’ll be ready to retire.
There has been a lot of research recommending a reasonable, safe rate of withdrawal in retirement based on different asset allocation models. This is the conversation you need to have with your financial counselor so you understand when you can retire and on how much money you will be able to live on. My favorite research on the topic of safe withdrawal rates are from Michael Kitces, creator of the blog “Nerd’s Eye View,” in particular his article “What Returns are Safe Withdrawal Rates REALLY Based Upon.”
Two other great contributors to the subject are Jonathon Guyton, CFP® and William J. Klinger. They co-authored an article titled “Decision Rules and Maximum Initial Withdrawal Rates” from the Journal of Financial Planning (March, 2006). They are experienced planners working with real retirees – their research is based on practical real-life scenarios. Your withdrawal rate will have to do with your tolerance to market risk, and your asset allocation and a plan that you must be disciplined to adhere to in order to make it work. You will be tested at least a couple times to pull the trigger and move all your money to cash when you are in retirement, but that will not help you with the uncertainty of how long you may live.
Once you’ve answered the question on what you’re safe withdrawal rate will be, add in any other income sources you will have such as social security income, rentals, or pension funds. Once you understand your income in retirement, the next step is to realistically look at your budget.
How much will you need to cover your monthly living expenses? In addition to your regular needs food, utilities, housing, car, insurance, activities, and extras, you will also need to factor in medical/healthcare. An article from the AARP website spells out the costs pretty well: “What Health Care Will Cost You.” When you have Medicare and supplemental coverage, it is not an insignificant monthly expense. There are many tools you can use to help you with the budgeting process. Mint.com is one useful website which will help you put together a budget and alert you if you go over your monthly spending amounts. Remember, when you’re no longer working, you have more time to spend. You will need to fill your days with activities and a budget must include the expense of those activities.
Our health is unpredictable. Despite living a healthy lifestyle, we can’t change our genetics or plan for what will specifically happen to us. However, we can be precautionary when planning our retirement goals. The American Hospital Association reports that 82 percent of average hospital stays are because of accidents. Heart complications, stroke and cancer (which affects one in every three women according the American Cancer Society) make up for 68 percent of that. The remaining 18 percent consists of all other procedures and surgeries. Just as we face physical decline, we may also face mental deterioration. Alzheimer’s and dementia affect more than 5 million people in the United States alone according to the Alzheimer’s Association. This disease develops in a person every 68 seconds and is projected to nearly double by 2050.
So while we don’t know what long-term expenses we might find ourselves needing in the future, it is almost certain we will have some unexpected expenses. According to LongTermCare.gov, “70% of people turning age 65 can expect to use some form of long term care during their lives.” Neither Medicare nor the supplemental plans cover long-term care expenses. According to our government, the average long-term care facility charges nearly $230 per day for the care of a single individual. That’s nearly $7,000 a month!
What do you have available to cover these expenses? I find a lot of my clients expect to cover it with the equity in their house, or a large pool of funds they have built specifically for this need. If you’re planning to use equity from your house, make sure it is readily accessible for you or your loved ones. That will make it less stressful to family when the time comes to make the decision. Still others will transfer the risk to an insurance company through an insurance policy such as Long Term Care[i]. If you plan on self-insuring, make sure you have at least $250,000 in order to get you through approximately three to four years in a long term care facility. At $7,000/month[ii], it adds up quickly. If you are going to self insure, it is also important that the money earmarked for these expenses is not sitting idly, but growing at a steady pace to combat the rising cost of inflation associated with long term care.
Feeling overwhelmed? This task is not easy, but it’s vital to get right. Finding a person who can create a custom plan for you and your needs will play a key role in your retirement success.
Allocate sufficient time and resources into this step. It is extremely important to understand what your cash flow will be in retirement, and develop a plan that will build your assets to the point you need them to be in order to retire comfortably. A plan needs to makes sense for your current income, projected inflation, accidents and health decline.
Professional financial planners can help to take the stress out of this tedious task — let them help you!
In case you missed it, this is crucial — I cannot stress it enough! Do the hard work now and look at your budget, plan for medical expenses and long term care scenarios — you know what they say about data: garbage in, garbage out! Inaccurate figures may produce insufficient funds in your future. Why risk it?
[i] This is not an offer to solicit long term care insurance. Consult with an insurance agent for more facts and information.
[ii] This is a national average. In your location this number may be higher or lower, be sure to research this and account for inflation.
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