Ensuring an Adequate Retirement Income

While plenty of people are duly committed to saving for retirement, it turns out several may actually be suffering a false sense of security. A report from the Employment Benefit Research Institute found that many people may not be poised for a financially secure retirement. 

The study found that 82 percent of respondents are not very confident in their ability to retire comfortably;one-third aren't confident they will be able to cover basic living expenses in retirement; and nearly half aren't confident they will be able to cover their medical expenses once they're retired. Almost one-third of workers report that preparing for retirement causes them to feel mentally or emotionally stressed.

“For many years, financial planners have espoused general formulas for determining the amount of income retirees will need,” says Ray LeVitre, CFP, founder/managing partner at Net Worth Advisory Group, a firm focusing on retirement financial planning. “However, it’s a very different world today, and old guidelines based on conditions that existed 30 years ago don’t necessarily reflect real costs of aging today. Compounding the complexity is that many retirement decision you make today are irrevocable, profoundly affecting one’s financial security and lifestyle for decades beyond.”

According to LeVitre, modern-day aging cost considerations include:

• A male turning 65 years old today can be expected to live another 19 years versus 11 years in 1970; for women, they can expect to live another 23 years
• The chances of retirees or an elder family member requiring some form of long-term care is 7 in 10.
• Many of today’s retirees are carrying some form of debt into retirement, including mortgages, consumer debt and student loans.
• Although inflation has moderated somewhat since the 1970s, lifestyle costs, such as housing, food and transportation consume a larger portion of a retiree’s budget today.
• Although health care cost increases have slowed, the rate of cost increases continues to be well above the general rate of inflation.

With this being the case, LeVitre suggestes these baseline steps to enhance  income sufficiency within 15 years of retirement.

1. Track your expenses now. You should begin to track your living expenses and gradually adjusting your budget to smooth out your consumption between your living requirements now and your requirements in retirement.
2. Start living like a retiree now. Taking it a step further, you could take the approach of changing your lifestyle now to reflect how you expect to live in retirement. That might mean downsizing your home now, reducing your leisure travel, driving more efficient cars and generally adopting a more frugal mindset.
3. Increase your savings. Any combination of the first two steps should generate steady increase in excess cash flow which should be saved for retirement. Pre-retirees within 15 years of retirement should target a minimum of 15 percent of their earnings for contributing to their retirement.
4. Start exploring your Social Security options. Retirees who are able to postpone their Social Security benefits until age 70 can significantly boost their lifetime income. Additional Social Security planning for spousal benefits could increase it further.
5. Don’t invest too conservatively. Although the natural inclination is to reduce your exposure to risk-based investments like equities the closer you are to retirement, reducing your exposure by too much, too soon could stunt the growth of your capital. To ensure lifetime income sufficiency, today’s retirees should always have some exposure to equities. A broadly diversified, well-balanced portfolio of equities, bonds and cash offers the best opportunity to maintain the necessary growth of capital needed while minimizing volatility over the long-term.

LeVitre also underscores that, regardless of your planning method or process, it would be a mistake to succumb to standard formulas or a generalized approach to retirement planning. 

“Right now, your retirement vision—formed by your specific needs, wants, attitudes and beliefs—rests in your mind, and it will undoubtedly change as your outlook and priorities change,” he says. “But, you should always base your income needs on realistic assumptions.”

Merilee Kern is executive editor and producer of the Luxe List International News Syndicate, which covers consumer product trends and the travel industry.