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Limit or Limitless? Careful Retirement Income Planning

By Vincent Camarota , Manager, Wealth Financial Advisor, RJFS
Limit or Limitless? Careful Retirement Income Planning

A Look at the Importance of Estimating and Generating Income for Retirement Plans.

Where do I start? You may understand the importance of planning for your retirement.  But where do you begin? One of your first steps should be to estimate how much income you’ll need to fund your retirement. Since retirement planning is not an exact science, that can be a complicated process. However, by doing a little homework and seeking help from a Financial Advisor, you could be well on your way to a comfortable retirement.

Use your current income as a starting point
It’s common to discuss desired annual retirement income as a percentage of your current income, which usually falls anywhere from 60% to 90% or even more.

The problem with this approach is that it doesn’t account for your specific situation. If you intend to travel extensively in retirement, for example, you might easily need 100% or more of your current income to get by. That’s why it’s worth going through all of your current expenses in detail and really think about how those expenses might change during retirement.

Project your retirement expenses
Your annual income during retirement should be enough to meet your retirement expenses. However, you may have difficulty identifying all your expenses. Especially if retirement is still far off.

To help you get started, consider these common retirement expenses:

  • Food and clothing
  • Housing: Rent or mortgage payments, property taxes, homeowners’ insurance, property upkeep and repairs
  • Utilities: Gas, electric, water, telephone, cable
  • Transportation: Car payments, auto insurance, gas, maintenance and repairs, public transportation
  • Insurance: Medical, dental, life, disability, long-term care
  • Healthcare costs not covered by insurance: Deductibles, copayments, prescription drugs, etc.
  • Taxes: Federal and state income tax, capital gains tax
  • Debts: Personal loans, business loans, credit card payments
  • Education: Children’s or grandchildren’s college expenses
  • Gifts: Charitable and personal
  • Savings and investments: Contributions to annuities and investment accounts
  • Recreation: Travel, dining out, hobbies, leisure activities
  • Care for yourself, your parents or others: Costs for a nursing home, home health aide or other type of assisted living
  • Miscellaneous: Personal grooming, pets, club memberships

It is important to remember that the cost of living may go up over time, and retirement expenses may change from year to year. Other expenses, such as healthcare and insurance, may increase as you age. Therefore, it might be a good idea to use estimates with a cushion factored in. Protect against these variables by building a comfortable cushion into your estimates and consider contacting a financial professional who can help ensure your calculations are as accurate and realistic as possible.

Decide when you’ll retire
The longer your retirement, the more years of income you’ll need to fund it. Maybe a booming stock market or generous early retirement package may make retirement at age 50 an option. However, it’s important to remember that retiring at 50 will cost you a lot more than retiring at 65.

Estimate your life expectancy
The age at which you retire isn’t the only variable that determines how long your retirement years will last. The other important factor is your life expectancy which takes into account your age, gender, race, health, occupation, and family history. When it comes to retirement planning, a longer life means even more years of retirement to fund. You could run the risk of outliving your savings and other income sources. There’s no way to predict how long you’ll actually live, but it’s probably best to assume you’ll live longer than you expect with life expectancies on the rise.

Identify your sources of retirement income
Once you have an idea of your retirement income needs, your next step is to assess the sources of retirement income that will be available to you. There are several vehicles that may be available to you when you retire:

  • Pension from a previous employer
  • 401k or other retirement plan at work
  • Social Security (visit SSA.gov) for estimating your benefits
  • IRA’s
  • Annuities
  • Part Time Work
  • Rental Income
  • Royalties from land or business ownership

Make up any income shortfall
If you’re well-prepared, your expected income sources will be more than enough to fund even a lengthy retirement.

A financial advisor can help you figure out the best ways to approach this, but here are a few suggestions:

  • Try cutting current expenses so you can save more for retirement.
  • Shift your assets to investments that have the potential to outpace inflation (but keep in mind that investments with higher potential returns may involve greater risk of loss).
  • Modify your expectations or goals in retirement so that you may not need as much money.
  • Work part time during retirement for extra income.
  • Consider delaying your retirement for a few years.

 

 

 

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