You've spent a lifetime earning your right to enjoy retirement. There's just one question: Are you financially prepared? As you prepare to make the transition from saving to spending, your financial advisor can help you create a retirement cash flow plan aimed at supporting your lifestyle to the fullest, while being flexible enough to adjust to unforeseen circumstances. Everyone has a different retirement plan, but there are certain factors everyone needs to account for when setting a plan to reach their retirement savings goal.
Plan for Longevity
As you think about what you want to see and do during your second act, plan for a long life. For couples aged 65 today, at least one spouse is expected to live to age 92. That means retirement could last almost as long as your working years. As a result, the planned age of retirement for the average worker has steadily crept upward, from age 62 in 1996 to 65 in 2006. A longer life will require your savings to last longer, a challenge since your chances of incurring higher medical costs become greater with age. Annual health care costs have increased much faster than inflation. Between 1980 and 2000, health care costs increased by an average of 6.2 percent a year, versus a general inflation rate of 4.1 percent. Assuming Medicare benefits remain at current levels, couples will need approximately $300,000 to cover health expenses in retirement if living to average life expectancy, and as much as $550,000 if living to age 95.
Find Your Number and Build a Portfolio
Your financial advisor can help you calculate your baseline living expenses and potential future expenses (unforeseen home repairs, medical costs, aging parents). But it's equally important to account for the cost of indulgences that bring enjoyment to life, the gifts you may want to make, and the things you dream of doing, like buying a second home or starting a business. This will include prioritizing your goals and assessing the value of your assets.
Then work with your financial advisor to create a portfolio aimed at reaching that financial goal. An effective retirement portfolio should generate a high enough investment return to meet your after-tax expenses and outpace inflation, while protecting you as much as possible from market downturns. It's especially important to maintain your stock allocation when planning for a long retirement. A portfolio overly concentrated in conservative investments exposes you to greater risk of outliving your assets. As you begin tapping your accounts, your financial advisor can help you maintain your portfolio's overall asset allocation, which can get thrown off by regular withdrawals.
Determine Your Odds of Success
Assess the statistical likelihood that you will achieve your goals and identify a rate of success you'll be comfortable with. For example, you might be comfortable with a 75 percent statistical likelihood of reaching your goal based on your investments. Or you might need an 85 percent likelihood to sleep soundly at night. Whatever your number, getting there may lead you to change your plans. Planning for the odds you're comfortable with may be one of the most satisfying moves you'll make.
Create a Withdrawal Strategy
Your retirement security will be directly related to how successfully you convert your savings into retirement cash flow. You should look at your retirement expenses and available assets to develop a withdrawal strategy aimed at maximizing after-tax income while ensuring you don't run out of money.
Dealing with Unexpected Job Transitions
The current economic and market environment has prompted many Americans to rethink their retirement strategies. If you experience a job transition-particularly if the transition is unexpected-such a reassessment may be particularly important. While it may be tempting to focus more on immediate needs, you should not lose sight of long-term goals, especially your retirement strategy.
Your employer-sponsored retirement plan is likely to be a key component of your retirement strategy. Because it represents a key source of future retirement income, it is important to carefully consider your alternatives for administering these assets when moving to a new job or moving on. During a transition, you will usually have three options: take a lump-sum distribution, leave your assets in the employer-sponsored plan or move your assets into a rollover IRA.
A lump-sum distribution provides you with immediate access to your funds. However, a distribution will likely result in substantial federal and state income taxes and, if you are under age 59 and a half, a 10 percent U.S. Internal Revenue Service penalty tax, which can significantly reduce the amount of the distribution.
Leaving your assets in a former employer's plan is an option, but one that may limit your investment choices and control. It does have some benefits. For example, many qualified retirement plans include loan provisions that are not available with an IRA, but may still be available to you. And you should look at the costs associated with any investments you may be considering because it could be less expensive for you to leave your assets in the former employer's plan.
Lastly, you can move your assets to a rollover IRA. These plans address the issues of taxation, flexibility and control, and may hold significant benefits. For example, investment products in an employer plan are usually limited to mutual funds and company stock. With a self-directed Rollover IRA, you can structure a portfolio using stocks, bonds, annuities and other investments using a customized asset allocation to help you meet your retirement investment objectives. If your distribution is transferred directly to a custodian, rather than to you, you will not be assessed any of the penalties generally associated with a lump-sum distribution.
Monitor Your Plan
Your retirement plan should be flexible and allow for continuous refinements. Ideally, you and your advisor would review the plan annually to keep your spending on track and react to any unexpected costs. n
Karen A. McKinley is a financial advisor with Morgan Stanley Smith Barney in Manchester. She can be reached at 603-629-0268 or fa.smithbarney.com/karenmckinley.
Current Issue - May 2024