Finance

Bulletproof Your Retirement Plan

Dan Nicholson

Retirement is just like money: Everyone wants it, but not everyone attains it. Planning for retirement requires careful consideration and strategic decision-making. As you navigate the complex terrain of Social Security benefits, expenses, and potential income sources, the goal is to chart a course that ensures both financial security and peace of mind.

Get in Your Right Mind for Retirement

Planning for retirement takes more than dreams of beaches and leisure time, although that’s helpful. According to Goldman Sachs’ report, “Retirement Mindset Matters,” there are four traits that successful retirees have: optimism, future orientation, the balance between risk and reward, and financial literacy.

Optimism — characterized by an inclination to overestimate the likelihood of positive events — shapes our outlook on the future. Future orientation, reflective of the connection to our future selves and the willingness to wait for delayed rewards, adds another layer to the decision-making process. The balance between risk and reward orientation becomes pivotal, as individuals weigh the pursuit of security against the allure of achievement in their goal-setting endeavors. Moreover, financial literacy emerges as a critical determinant, influencing the level of fluency and comprehension of fundamental financial concepts that underpin sound retirement planning. By dissecting these facets of decision-making, we gain insights that can prove invaluable in addressing the challenges inherent in preparing for retirement.

Do the Math On Your Retirement

Age-based goals serve as reliable markers to gauge progress, and leveraging straightforward formulas simplifies the intricate calculations associated with retirement savings. Experts advise aiming for a nest egg equivalent to 10 times the pre-retirement salary, with a target of 80% of the annual pre-retirement income for a comfortable retirement. The 4% rule, a widely endorsed strategy, involves dividing the desired annual retirement income by 4% to determine the required retirement savings. 

It’s important to note that the 4% rule is just a guideline and not a hard and fast rule. Some experts say that 5% is a better number because it allows more money for retirees to enjoy their lives. Others say 3% is better.  

The actual amount that you should withdraw each year will depend on your individual circumstances, such as your age, health, and financial situation. It’s always a good idea to consult with a financial advisor to determine the best course of action for your retirement plan. And it’s important to understand your Required Minimum Distribution (RMD), which is the minimum amount that IRA and retirement plan account owners must withdraw annually starting with the year they reach age 72.

Age Ain’t Nothing But a (Financial) Number

Navigating the intricacies of retirement decisions involves a series of critical considerations. Opting to claim Social Security at 62, while providing immediate financial relief, comes at a cost with a substantial 25% to 30% reduction in benefits. Conversely, delaying the claim until age 66 or 67 ensures full benefits, a strategic move embraced by many. The average retirement age stands at 64.6 for men and 62.3 for women, underlining a gender-based distinction in workforce participation. Retirement at 65 opens the door to Medicare benefits, offering crucial healthcare support. 

Retiring before 65 necessitates a substantial nest egg, with experts advising aiming for 12 times the pre-retirement salary while budgeting for health insurance costs becomes imperative. Optimal timing between ages 66 and 70 not only grants full Social Security benefits but also provides tax advantages. Delaying retirement not only allows for catch-up contributions but also aligns with Medicare eligibility at 65. 

For those contemplating late retirement at 70 or beyond, the prospect of a significant increase in Social Security benefits, ranging from 124% to 132%, becomes a compelling incentive. Amidst these considerations, a prudent suggestion emerges: contemplate delaying retirement for both financial preparedness and to navigate potential economic impacts. With full retirement age varying and gradually increasing to 67 for those born in 1960 or later, it's clear that a one-size-fits-all approach doesn't apply. The average retirement age for women at 62.3 and men at 64.6 highlights individual variations in retirement timelines. Ultimately, ensuring financial preparedness emerges as a cornerstone before making the pivotal decision on when to retire.

The Role of Expenses in Retirement Planning

Estimating expenses is a critical component of retirement planning, and the three-bucket approach simplifies this process. Categorize your must-haves, and discretionary costs, and create a contingency reserve for emergencies. Must-have expenses encompass essentials like shelter, groceries, transportation, utilities, debt payments, health care, and taxes. 

When envisioning your retirement, a comprehensive consideration of potential expenses is paramount for effective planning. Your retirement plan should meticulously account for various financial aspects, incorporating both essential and discretionary needs. Basic necessities, encompassing food, shelter, transportation, healthcare, and other essentials, form the bedrock of your financial blueprint. Discretionary needs, including travel, hobbies, and entertainment, contribute to enhancing your overall quality of life. Maintain a robust contingency reserve, equivalent to six to 12 months' worth of expenses, for added financial security. Continuing payments on outstanding debts, such as mortgages or car loans, is a financial responsibility that persists into retirement. Additionally, factoring in taxes on income, Social Security benefits, and any other retirement income is crucial for maintaining fiscal responsibility.

As you age, healthcare costs are anticipated to rise, necessitating budgeting for insurance premiums, deductibles, and copays. Long-term care, especially if nursing home care becomes necessary, is an essential consideration in your retirement financial plan. Acknowledging the impact of inflation on your savings over time is equally crucial, prompting a thoughtful approach to counteract its erosive effects on your retirement income. 

Income Diversity Is the Financial Spice of Life

Beyond Social Security, exploring various income sources is key to financial certainty in retirement. Supplement Social Security with distributions from retirement accounts like Roth IRAs or 401(k)s. Traditional pensions, part-time work, leveraging home equity through downsizing or reverse mortgages, and potential inheritances are supplementary avenues worth exploring.

Inflation and unexpected expenses can erode the best-laid retirement plans. To counteract this, inflation-proof your plan by incorporating assets like stocks, real estate, and inflation-protected securities. Seeking advice from a financial advisor is also crucial. Even for those financially savvy, a second opinion can provide valuable insights, identify potential blind spots, and ensure a comprehensive and resilient retirement plan.

Conclusion

Careful consideration and proactive decision-making are necessary for a secure retirement plan. From optimizing Social Security benefits to adopting practical expense management approaches and diversifying income sources, individuals can pave the way for financial certainty. Navigating challenges such as inflation and unexpected expenses requires a forward-thinking mindset, with the importance of seeking professional financial advice highlighted throughout. Ultimately, the key takeaway is that a well-rounded retirement plan involves meticulous attention to detail and a thoughtful approach. By incorporating these strategies, with the help of a certified financial planner, people may retire with confidence, ensuring a comfortable and resilient financial future.

Sources

Nerd Wallet

Investopedia

Goldman Sachs

IRS.gov

Dan Nicholson is the author of “Rigging the Game: How to Achieve Financial Certainty, Navigate Risk and Make Money on Your Own Terms,” deemed a best-seller by USA Today and The Wall Street Journal. In addition to founding the award-winning accounting and financial consulting firm Nth Degree CPAs, Dan has created and run multiple small businesses, including Certainty U and the Certified Certainty Advisor program.

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