The Basic Retirement Question - Will You Have Enough Money?
When planning for your retirement, the issue of money will dictate most of your decisions. Many of us would like to think otherwise, but without money, life in our society is not pretty. Your level of financial preparedness will determine when you retire, where you will retire, what you will do with yourself in retirement, and ultimately, what you leave as a legacy for those you leave behind.
It is often said that no one plans to fail, just that they failed to plan. Retirement, in our world, is the second major life changing event in most peoples lives. The first is when you leave home as a young adult and begin to make your own way in life. Over many years, you provide for yourself and your family, and if you are reading this, chances are you have achieved some measure of financial success. The second major shift (with the possible exception of spouses and children!) is when you decide to stop working for money and have money start working for you.
At the very least, ongoing retirement and financial planning will help you understand the financial consequences of retirement. The decisions you make now, and will continue to make, are a function of applying limited resources to potentially unlimited demands. We use a state of the art technique called Monte Carlo simulations. It provides a range of probabilities surrounding your investment decisions, designed to help you decide which course of action to take.
Recent studies have found that, during retirement, the average American needs between 60% and 80% of their pre-retirement income in order to maintain their pre-retirement standard of living. Your personal needs and wants will determine where you fall on this spectrum. Here are some thoughts to put this in perspective:
- You may be helping to support children or grandchildren.
- Your work related expenses should be dramatically reduced.
- You may have successfully paid for your home and no longer have a mortgage.
- You will probably be in a lower tax bracket.
- You may want to travel and have a second home that will increase your expenses.
Once you have estimated your target retirement income, you need to start evaluating the sources of income available to you. These generally fall into three categories:
Government Sources. The federal government in 1935 created the concept of Social Security. It‘s available to almost everyone, and the amount you receive is based on how much you earned and contributed during your working years. The most you might expect to receive is currently about $2000 per month. But it could be much less.
Employer Sponsored Plans. Many employers offer company sponsored retirement plan which generally fall into two categories. Defined Benefit Plans are normally funded entirely by the employer and provide a guaranteed retirement based typically on how many years you worked there and how much money you were paid. Defined Contribution Plans are typically funded by both the employer and by you. As the employee, you own an account balance, perhaps subject to vesting, made up of contributions and earnings. At retirement, you make the decision about how your money will be distributed.
Personal Savings. A most important and often overlooked source of retirement income is one‘s personal savings. The dilemma faced by many, however, is that much of it is illiquid and not available as a monthly income. Certainly your personal IRA and directly held assets will generate an income, but how about your home equity or a vacation home. You should be aware there are techniques to use these assets to create income without giving up ownership or possession.
In summary, there are so many ways that proper planning can give you the peace of mind necessary for a successful retirement. The more time you have to prepare, the more effect you can have on a positive outcome. A sound financial plan and ongoing professional advice can make a significant difference.