By Sarah Ruef-Lindquist
For Pen Bay Pilot Wave
Many of us spend between 35 and 45 years working, earning and saving for retirement. People retire and shift into a spending mode but they often want to be sure they will have what they need, and won’t outlive their money. Every day people thinking about their retirement ask me “How much do I need to have set aside to retire?”
Well, that depends. As financial advisors, we look at known data and estimate some other amounts as best we can.
First, we look at the sources of projected “guaranteed” income like pensions or social security, and consider especially the timing of beginning one’s draw on social security. Beyond your Full Retirement Age (“FRA” which depends upon the year you were born) you can add 8% to the value of your benefit by waiting a year, up until age 70, which is the current mandatory age to begin withdrawing from social security.
Once we have a good estimate of “guaranteed” sources of income, we look at savings: We look at “qualified” accounts, like 401(k)’s, 403(b)’s and IRA’s. We look at ROTH accounts, that can be withdrawn tax-free. We look at non-qualified savings and investment accounts. We can use a ball park figure of 4% or maybe 5% (depending on how much someone wants to leave in their legacy at death) and calculate that percentage of both qualified and non-qualified savings that one could spend in a given year, and add that to the “guaranteed” amount we already estimated.
Then we look at expenses: usually the big unknown is health care. We examine lifestyle, whether there will be lower expenses upon leaving the workforce, or downsizing a home or moving, and what the resulting cost of living will be. Also, any plans to remain even part-time in the workforce. And we estimate whether there is excess income, or a gap to cover planned costs of living. This can help us determine if our current savings plan is “on track” or perhaps needs to be increased. Inflation is also a factor to be considered, now more than it has in recent years.
It makes sense to begin this kind of planning 10 years and certainly at least 5 years before any planned retirement date. It also makes sense before making any significant elections, like social security withdrawals, that may be permanent. Get in touch with your Financial Advisor, and begin this very important conversation if you are planning your retirement.