When you’re young, the idea of retirement is shrouded in idle thoughts of what you’ll do when you don’t have to work anymore. But while those fast approaching retirement may have a clearer view of what is to come, in some ways, they are just as unaware of what is really in store for them over the next few decades. Most of us don’t know how long we’re going to live, so making sure we have sufficient funds for our entire retirement is incredibly important.
How Much to Save?
While it’s thought you may only need as low as 70% of your current income per year in retirement, it is wise to assume you will need closer to 100%. Think of all the things you enjoy doing now: Traveling, hobbies, attending cultural events and sports games. All of these could be a vital part of an active and interesting retirement, but they also cost money.
A tip: Make sure you have saved enough to be active and your withdrawal rate is not so high that your resources could deplete early. While it’s always customizable, a good starting point is to withdraw 4% in the first year of your retirement, and continue to adjust for inflation down the road.
Cutting back on living expenses now will free resources for more contributions to your retirement and give you an idea of how little you can live comfortably on. This will give you a better idea of how much you will really need in retirement. The most important expense to get rid of is payments on any debt. your cost of living will be significantly reduced if you have paid off your mortgage and any outstanding consumer debt.
When forming a plan or determining if you are ready to retire now, err on the side of longevity when it comes to your lifespan. Add a few years to what is generally expected — plan on living until 85 or 90. It is a far better situation to have saved more than necessary than to run out of funds late in life. In the vein of further caution, it is a good idea to have an emergency fund outside of your retirement plan. A general rule is to have at least six months of living expenses tucked away just in case.
What about Housing?
In general, housing should take up about 25% of your gross pay or 35% of your take-home pay. If you own your own home and have paid off your mortgage, this shouldn’t be a difficult guideline — but remember that with a house comes additional, and often expensive, repair and maintenance costs. If you plan on staying in your home throughout your retirement, make sure the big stuff is in good working order or replaced while you are still drawing income. This includes the roof, the foundation, siding, HVAC, sewer lines, and septic system, as well as an emergency fund in case of fire or water damage.
Your house will also need to be adapted for your needs as you age. You may need to consider selling a home that requires a lot of upkeep and downsizing to something more manageable. No one wants to face the reality of physical deterioration, but most people face mobility issues as they age and a one-story home is safer and easier to navigate.
Continuing Income Options
It may be tempting, but resist the urge to take early retirement. It is difficult enough to save enough money to live on in retirement if you are only retired for 20-25 years. imagine if you retire at 55 years old and live for another 35 years. You will need funds to support yourself in retirement for longer than you were in the workforce. every extra year you work is a year you don’t have to support yourself using your retirement savings.
Once you’ve retired, it can be helpful for your savings and your wellbeing to work a casual, light job. Many retirees find themselves missing the comradery of the workplace and the continued income will allow for more spending money, vacations, and greater security in your savings. You could put your experience to work for you asa part-time consultant in your former field, or put in a few hours a week at the town museum.
Last but not least, consider longevity insurance. This is a type of deferred annuity that will continue to provide income well into your twilight years. People usually purchase it at around 65 years old, and the payout begins at 80 years. Please call if you’d like to discuss this in more detail.
Consider Bond Tents
An important strategy to consider is building a bond tent before you retire. this strategy increases the allocation of bonds during the 10 years or so prior to retirement, and then the bonds are sold from this portion of your portfolio during the first 10 to 15 years of retirement, providing you with an income stream.
This strategy is called a bond tent because if you were to look at it on a line graph, the bonds in the portfolio steadily rise until it reaches a peak at retirement and then falls as the bonds are sold, which makes a tent shape.
The strategy works by reallocating a traditional 60/40 mix of stocks and bonds to an allocation of 50% or 60% in bonds by the time you retire. The bond holdings are then sold during the first half of retirement until the original mix is once again reached. This provides portfolio protection against major losses due to a market downturn during the first half of retirement. The portion of your portfolio that is still in stocks will continue on the path for long-term growth to fund your later years of retirement as well as provide protection against inflation.
Calculating Your Life Insurance Needs
While life insurance can serve a variety of purposes, one of the most common is to maintain your family’s standard of living in case you die. Many rules of thumb exist, such as five to seven times your annual income, but don’t rely on rules of thumb to determine your coverage. They don’t take into account your individual circumstances. your insurance needs will probably change over time. to determine how much insurance you need, consider these questions:
What lifestyle do you want to provide for your spouse and dependents after your death?
Review your needs in detail, taking a look at things like:
- Do you want to provide the same standard of living? Will your spouse and children live in the same house?
- Will the family need different childcare arrangements?
- Do you want to provide for college educations?
- If your spouse doesn’t work, do you want that to continue, or do you expect him/her to work after your death?
- Do you need to consider the support of elderly parents?
- How long must your family live off the insurance proceeds? Will your current retirement fund provide enough income for your spouse to live on after retirement or do you need to provide income until his/her death?
- Do you want to pay off a mortgage or other debt with insurance proceeds?
- Do you have estate-tax considerations you want to address with life insurance?
How much will that lifestyle cost?
Come up with an estimate of how much this lifestyle will cost. Include all of your current expenses that would remain the same, as well as any new expenses you have identified. Remember to factor in hidden costs, such as providing for health insurance that was paid for by your employer. For large debts, such as a mortgage, determine whether it makes sense to pay the loan off in full or to continue making monthly payments.
How much life insurance do you need?
First, consider what other income sources your spouse and/or dependents will have. this could include your spouse’s earnings, retirement plans, Social Security, savings, and investments. life insurance proceeds will be needed to provide the difference.
Your life insurance needs will change over time, so you should periodically go through this analysis. Please contact us to discuss your life insurance needs.
There are special risks associated with investing with bonds such as interest rate risk, market risk, call risk, prepayment risk, credit risk, reinvestment risk, and unique tax consequences. To learn more about these risks and the suitability of these bonds for you, please contact our office.