Are You Still on Track for Retirement?

today’s TOPIC Are You Still on Track for Retirement?

BY » Peter Eisenhauer

In times of economic uncertainty, it is important to take stock and assure yourself that you have done everything you can to secure your financial future. Here are a few perspectives and tools you might consider if you are looking forward to retirement.

Daniel Tobias, of of Passport Wealth Management, in Cornelius, emphasizes the importance of keeping the big picture in mind. “In order to be on track for retirement it helps to know what (and even perhaps when) retirement might look like for you,” Tobias said. “Even if you don’t have all the answers, taking the time really think hard about what you want for the future is an important starting point. Some people love what the do and want to maintain ties to their career as long as they can while others want to get out and to the beach as soon as they can afford to do so. Once we know where we’re going, and what we’re saving for, we can set a strategy to follow which will carry us through all manner of economic turmoil, inclusive of today’s high inflation.”

Certainly one question to answer is ‘how much money will I need in retirement?’ A common figure cited by experts is that your retirement income should be about 80 percent of the the pre-tax income during your working years. One explanation for this figure comes from the AARP, which says “The 80 percent rule comes from the fact that you will no longer be paying payroll taxes toward Social Security (although you may have to pay some taxes on your Social Security benefits), and you won’t be shoveling money into your 401(k) or other savings plan. In addition, you’ll save on the usual costs of going to work...such as new clothing, dry cleaning bills, commuting expenses and the like.” This number is backed up by statistics showing that for example in 2017-2018 the average annual spending for all adults was $60,815, whereas for 65-year-olds it was $50,178. Which if you do the math is 82.5% and change. You might think that with lower daily transportation costs, and no need for that work wardrobe your costs would go down, and they do, also in the categories of education, insurance and housing (though only moderately). Those are offset somewhat by increase in Healthcare spending.

Keeping your personal goals in mind allows you to adjust this figure. Are you planning to downsize and live more simply? Do you plan on extensive travel? Do you have family or organizations you want to help? Would you like to leave a financial legacy or spend every dime before you shake off this mortal coil?

With an idea of how much you will need, attention turns to where that money comes from. Although never intended as a sole source of retirement income, the Social Security will be a substantial source of income for most retirees -- providing about 40% of their average wage income. The Social Security Administration points out that every person’s retirement situation is different, but there are two key facts everyone should consider when considering their options for collecting Social Security. One is that the amount of the benefit will depend on when you start collecting. In general, taking benefits before your full retirement age (66 or 67, depending on when you were born) lowers the amount you will get each month. On the other hand, delaying benefits past your full retirement age, up to age 70, increases the monthly amount for the rest of your life. Obviously, there is a calculation to be made as to how long it takes to make up in higher benefits what you didn’t collect in the prior years. There is extensive information on this at www.ssa.gov/benefits/ retirement/matrix.html. On the other hand, if you elect to collect Social Security before your full retirement age and keep working, the benefit will be reduced if your pay is above a certain limit. However, that money is later added back to your benefits once you reach full retirement age. Also note that if you earn substantial income while drawing benefits, some of your benefit will be taxable, so it’s a good idea to work with a tax professional to minimize the impact. Derek Bostian, Two Waters Wealth Management, in Huntersville, notes that “Social Security withholding and tax rules related to earning income during retirement are not simple, but there are strategies that can help optimize your situation.”

Unless you are fortunate enough to have a defined benefit pension, savings and investments will be the other major source of retirement income. Many experts cite a rule of thumb that retirees can safely withdraw about 4% of their total savings each year. As noted in an AARP publication the basis for this is a landmark 1998 study from Trinity College in Texas on the most sustainable withdrawal rate from retirement savings accounts over various time periods. “The study found that an investor with a portfolio of 50 percent stocks and 50 percent bonds could withdraw 4 percent of the portfolio in the first year and adjust the withdrawal amount by the rate of inflation each subsequent year with little danger of running out of money before dying. For example, if you have $250,000 in savings, you could withdraw $10,000 in the first year and adjust that amount upward for inflation each year for the next 30 years.”

The 4 percent rule is considered conservative, and analysts suggest that you can improve on those results with a few simple adjustments. For example, by not withdrawing money from your stock fund in a bear market year, or foregoing inflation “raises” for several years at a time (maybe not this year). But the AARP advises that at least at first, it’s best to be conservative in withdrawals from your savings, if possible. Source: https://www.aarp.org/ retirement/planning-for-retirement/ info-2020/how-much-money-doyou-need-to-retire.html. Experts also strongly urge that you diversify your investments and avoid making frequent changes to your portfolio.

David R. Hedges, CWS®

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