Retirement Planning in Today's Economy
The New Face of Retirement PlanningBy David M. Wasley
(In conjunction with Lincoln Financial Advisors, a registered investment advisor)
Retirement these days just isn’t what it used to be. A generation ago, many Americans spent their golden years pursuing mostly sedentary activities like fishing or golfing. Today’s retirees are redefining this phase. Retirement now often means traveling the world, giving back to the community through volunteer work or starting a little business. But can these activities be financed with today’s escalating retirement bills?
Medical costs have risen faster than inflation for much of the last decade. Indeed, a recent industry report estimates that couples retiring at age 65 will need about $200,000 to cover out-of-pocket healthcare expenses alone. Concurrently, key sources of income are drying up. The traditional corporate pension is disappearing and Social Security recipients may eventually face a reduction in benefits.
The result is that people are more responsible for financing their own retirements. The parents of many baby boomers typically worked at one job all their lives and could rely on a pension and Social Security. But those pillars are weakening, just as we’re living longer and paying more for healthcare. So it’s a very big challenge.
Take Stock of Finances - However, retirement doesn’t have to be an anxious period, as long as individuals are willing to work out a realistic retirement plan. People often are reluctant to take stock of their finances because they are afraid of what they might find out. But regardless of where you stand, you’ll always feel better knowing the situation.
Most people make two major mistakes when calculating how much they will need to fund a retirement that could span 30 years or more. First, prospective retirees typically overestimate the amount of money they can pull from their savings each year while still leaving the principal intact. Unusually generous returns from Wall Street during the 1980s and 1990s, for instance, may have created the false impression that a 10%-plus annual withdrawal rate was reasonable without depleting the piggy bank.
That’s not realistic, though. A prudent mix of stocks and bonds will probably result in a more conservative result over the long term. After taking into account inflation and taxes, taking 4% out of savings each year is more reasonable. In practical terms, a 4% initial withdrawal rate means that it would take a $1 million nest egg to generate $40,000 in annual income. However, the number of withdrawals should be adjusted each year depending on actual results.
The other common mistake is underestimating how much money will be needed to live on after leaving the workforce, in light of longer life spans and today’s more active retirement lifestyles.
The popular rule of thumb that retirees can live on 70% of their pre-retirement income may be optimistic. Apparel and tax bills might decrease in retirement, but those reductions are often offset by larger travel and medical costs. Even at the 70% replacement rate, however, a working family earning $100,000 would need to generate at least $70,000 a year in retirement.
Planning Is Crucial - Increased longevity, soaring healthcare costs, the demise of the defined-benefit pension, possible cuts in Social Security and active retirement lifestyles may require some individuals to work longer than expected and save more money. Each year that you’re earning even a few dollars extends how long your savings will last. And remember: Your earnings don’t have to come from your old day job. You could still stretch out your savings by doing something that you’ve always wanted to do.
You can relieve your anxiety about retirement by reviewing your goals with your financial planner. After the initial planning session, one checkup a year is usually all that’s needed to help stay on track.
For all planners - David M. Wasley, CRPC® is a registered representative and investment advisor representative of Lincoln Financial Advisors Corp., member SIPC, 50 Santa Rosa Avenue, Santa Rosa, CA 95404, (707)523-4550 offering insurance through Lincoln Marketing and Insurance Agency, LLC and Lincoln Associates Insurance Agency, Inc. and other fine companies. This information should not be construed as legal or tax advice. You may want to consult a tax advisor regarding this information as it relates to your personal circumstances.