Many people approaching retirement focus on one question: “Do I have enough saved?” It is an important question, but it is only the beginning.
A retirement portfolio is more than a number on a statement. Its role is to help support your financial needs and goals throughout retirement.
Instead of asking only, “How much do I have?”, consider a different question: “What do my retirement savings need to accomplish for me?”
Answering that question requires looking at more than your account balances. It requires considering your income needs, other sources of retirement income, taxes, healthcare, investment risk, and your goals for the future.
In this newsletter, I will go through 6 steps to help you get a vision for your retirement plan.
Step 1: Start With the Basics
Before determining whether your retirement savings may be sufficient, it is helpful to establish a general understanding of your retirement timeline and circumstances.
Consider:
- Your desired retirement age
- Your estimated Social Security benefits
- Pension income and when you expect it to begin, if applicable
- Your spouse's retirement plans and income needs
- Healthcare and insurance costs, particularly if you retire before Medicare eligibility
Retirement planning is not simply a one-time calculation. Your circumstances, goals, expenses, and sources of income can change over time. Reviewing your plan periodically can help you identify when adjustments may be appropriate.
Step 2: What Will Your Income Needs Be?
When considering how much you may need in retirement, start by thinking about how much income your household expects to need, rather than focusing solely on an account balance.
Consider your:
- Essential monthly expenses
- Discretionary spending
- Current lifestyle
- Anticipated changes in spending
- Major future expenses
- Travel, hobbies, or other retirement goals
One helpful question to ask is: “If my paycheck disappeared tomorrow, how much monthly income would I need to maintain my lifestyle?”
Having a clearer picture of your anticipated spending can help provide context for determining how your other sources of income and retirement assets may fit together.
Step 3: What Income Can You Count On?
Next, identify sources of retirement income that may help cover your expenses.
Depending on your circumstances, these could include:
- Social Security
- Pension income
- Annuity income
- Other sources of predictable income
A simple planning framework is:
Estimated retirement income needs − Other reliable income sources
= Amount that may need to come from savings and investments
*This is a starting point and not a guarantee or projection of future investment results. Your actual retirement income needs and the amount you may withdraw from investments will depend on your individual circumstances, including market conditions, taxes, expenses, and other factors.
Step 4: What Do Your Assets Need to Support?
This is where retirement planning becomes more comprehensive than simply comparing income to expenses.
Your retirement assets may need to help support:
- Ongoing living expenses
- Changes in spending throughout retirement
- The potential impact of inflation
- Healthcare and long-term care expenses
- Travel, hobbies, gifts, or other lifestyle goals
- Unexpected expenses
- Different financial needs at different stages of retirement
Two households with the same amount of retirement savings may have very different financial circumstances. Their income needs, Social Security benefits, pensions, taxes, goals, spending patterns, and time horizons may all be different.
There is no single retirement savings amount that is appropriate for everyone.
Step 5: Don't Forget About Taxes
Not all retirement assets are treated the same way for tax purposes.
Your retirement savings may include a combination of:
- Tax-deferred accounts, such as traditional IRAs and 401(k)s
- Roth accounts
- Taxable investment accounts
Understanding the tax characteristics of your different accounts can be an important part of retirement planning.
The amount shown on your account statement is not necessarily the same as the amount available to spend after considering taxes. Your account types, income sources, tax situation, and withdrawal strategy can all affect your overall retirement picture.
Step 6: How Could Market Changes Affect Your Plan?
If we knew exactly how investments would perform throughout retirement, planning would be much easier. Unfortunately, we don't.
A retirement plan should account for uncertainty and allow for adjustments as circumstances change.
Some factors to consider include:
- Market volatility
- The potential impact of taking withdrawals during periods of market declines
- Diversification
- Liquidity needs
- Investment time horizon
- Risk tolerance
- How your investment strategy aligns with your overall financial circumstances
There is no investment strategy that eliminates market risk. The goal of a financial plan is not to predict what markets will do, but to understand how different circumstances could affect your overall plan and consider whether adjustments may be appropriate.
The Bigger Question
Retirement planning isn't simply about reaching a particular account balance.
It's about understanding what your resources may need to accomplish and how your savings, income sources, expenses, taxes, investment strategy, and personal goals fit together.
Instead of asking “Do I have enough?” It may be more useful to ask: “What do my retirement savings need to accomplish, and is my current plan designed around that?”
If you're approaching retirement and would like to take a closer look at how your current savings and income sources fit into your overall retirement picture, I would be happy to help you review the numbers and identify the factors that may be important to your plan.
For a free consultation, click this link to get started!