When investing for a future retirement, or if you're already retired, investors face increasingly complex challenges in planning for retirement income to last a lifetime. When building a retirement plan consider:
A good Retirement Income Plan ensures you won't outlive your assets in retirement. While investors only consider their individual life expectancy, according to statistics, half of the population will live longer than their life expectancy.
A more prudent approach to retirement income planning is to plan for longevity, which is how long you are likely to live. We always say that clients should plan on living and not dying; it is always a good idea to plan to live longer than you think you will.
With longer lifespans come higher healthcare costs. In addition, the safety and financial soundness of Medicare may cause further gaps in coverage in the future.
Retirees need to plan on funding a considerable amount of their own medical costs for heathcare that is not covered by Medicare.
And as we live longer, it is an absolute necessity to consider how you will fund possible long-term care, which averages over $70,000 annually in the U.S. 40% of Americans over age 65 will enter a nursing facility during their lifetime.
Retirees need to take inflation into consideration and how it will affect the money they will need to live in Retirement.
When it comes to inflation investors need to understand that annual inflation is around 3%. That means that in 10 years a retiree will need to withdraw 30% more money, or more than $13, from their retirement assets to purchase the same goods and services that cost $10 today.
It is key to take Inflation Risk into account when investing for, and in, retirement.
Those nearing retirement, or already in retirement, must continue to invest for the future. Sometimes, the fear of losing money forces investors to invest too conservatively and their assets can't outpace inflation, market changes, and fees. Some who haven't saved enough will tend to invest aggressively to try to make up for lost time. Both of these strategies have inherent risks and should be avoided.
Many people are hesitant to assume any market risk, especially after seeing retirement accounts lose significant value in the 2001 and 2008 recession. However, it is important to remember that long-term returns are attributed to time in the market, not timing the market.
For most retirees, a balanced approach to asset allocation is the best option.
Sustainable Withdrawal Rate
Working with our clients on recreating their paychecks in retirement allows them to determine what assets they have, how much they need on a monthly basis, and how they should be invested to last for their lifetime.
Even the healthiest retirement savings accounts can be reduced quickly if retirees don't have a sustainable plan in place.
While a general figure, experts believe you will need 70% of your pre-retirement income in retirement. Conventional wisdom says that in order not to outlive your retirement nest egg, the sustainable withdrawal rate is 4%-5%. This means for every $1,000,000 in retirement savings, you can withdraw between $40,000 and $50,000 in annual income.
As this is unique to every investor your best course of action is to sit down with your financial planner before you retire to create your Retirement Strategy.
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