A couple of weeks ago, I published the Seven Planning Areas for Seniors. The first area is Income Planning. Here are some thoughts on Income planning in retirement.
For the past 50 years, or so, you have been supporting your Net Worth (Assets - Liabilities = Net Worth). Net Worth is important because when you step off the treadmill of trading time for money, your Net Worth will now need to support you for the rest of your life. In a recent conversation, I said there are only two words to consider for retirement income planning: Preservation and Duration.
Preservation - Preserving spending power means investments must at least keep pace with inflation of about 2% annually. Seniors must consider higher inflation because their "shopping cart" is filled with higher cost items like healthcare (5-6%) and assisted living (6.7% according to Genworth).
Duration - How long must my assets last? Here's a fun calculator on how long you will live Click Here - it does require some work but it may surprise you. There is a 25% chance at least one of a 65 year old couple will live to age 95. So plan on a long time in retirement. (My projected age on the calculator was 94)
So What Are The Income Sources in Retirement?
Social Security - First for most Americans will be Social Security. For example, to generate $2,000 / month Social Security benefit, one would need to have about $600,000 in savings generating 4% income. The question then becomes "How much income will I need in retirement?" If SS only replaces 33%, one would need an additional $4,000 / month, or about $1,200,000 using the same 4% rule.
Data from the Social Security Administration (SSA) shows that 61% of retired workers count on their benefits to provide at least half of their monthly income. For unmarried elderly individuals this figure jumps to 71%.
Yet according to the SSA, Social Security benefits are only truly designed to replace about 40% of the average worker's wages during retirement. Based on the $1,364 that the average retired worker receives each month (as of Feb. 2017), or $16,364 a year, this means around $24,000 in additional annual income (approximately 60%) should be derived from other sources aside from Social Security (e.g., a pension, 401(k), IRA, or some other retirement or investment account).
Pensions - the number of companies offering pensions has declined dramatically in the past 40 years, since 401k's took off. Government and educators are typically looking at pensions; others may not be as fortunate. Business owners can set up their own pension in the form of a Defined Benefit Plan. Pension funding is limited by law to $225,000 / year or less based on age and income of the participant.
Retirement Savings - Retirement savings in the form of 401k, SIMPLE IRA, SEP, and IRA's are tax-deferred plan that refers to sections of the IRS statutes. They are also known as Defined Contribution Plans, a . Instead of receiving a defined pension, or benefit coming out, the participant gets to define the contribution going in. Many think of the 401k balance as "their" money, without realizing approximately one third will belong to the government to pay taxes when they begin taking distributions. Important to keep in mind that Retirement Distributions require a completely different level of planning than Retirement Accumulations. Dollar Cost Averaging works to benefit in Accumulations but work in reverse when taking distributions.
Personal Savings - Savings in taxable accounts make up the rest of savings. Savings Accounts, Certificates of Deposit, or taxable investment accounts.
Regardless of your income sources, it makes sense to have a plan in place for the next 30 years. Feel welcome to call if I can help.