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Will My Assets Generate Enough Income in Retirement?

After decades of working hard to provide for themselves and their families, most people look forward to the time when they will be able to retire. However, plans for retirement can vary considerably. Some hope to spend time traveling to new and distant places, while others plan to passionately pursue a hobby or activity such as golf. Still others look forward to spending more time with loved ones, or donating their time and resources to help those that are in need and less fortunate. Whatever their plans, most people underestimate what it takes financially to provide for a comfortable, successful and long retirement.

The retirement landscape has changed since Social Security was implemented in 1935. Back then, many workers had a pension that was provided by their employer. That pension, along with social security and a relatively small amount of savings, was often adequate to provide for a comfortable retirement that, on average, lasted approximately thirteen years.

Achieving a comfortable retirement is more difficult today, as evidenced by the sobering statistic that approximately only one-in-three workers can afford a comfortable retirement at the normal social security retirement age of approximately 66. The two-out-of-three that cannot afford it must either reduce their lifestyle in retirement and/or delay their retirement by working longer. Achieving a comfortable retirement at normal retirement age has become more difficult due to the following:

  1. People Are Living Longer – In the 1940’s, the average life expectancy for those that reached age 65 was approximately age 78, resulting in an average retirement period of thirteen years. Today, people are living much longer. It is often advisable for a couple approaching retirement to plan for at least one of them living to age ninety or longer, which translates to a retirement period of approximately twenty-four years. Making savings last over a significantly longer retirement period means that in most cases, more retirement savings will be needed.

  2. Fewer Pensions – Pensions in the private sector are disappearing, therefore, fewer people will have what was once a common and key source of retirement income. Those that do not have a pension will need more retirement savings to replace that traditional piece of the retirement puzzle.

  3. The Effects of Inflation – Long-term, inflation in the United States has averaged approximately 3% per year. At that rate, living expenses of $3,000 per month will grow to $4,406 over thirteen years. However, over twenty-four years, that same $3,000 will grow to $6,098. Keeping up with inflation, over a longer retirement period, will also mean that more retirement savings will be needed.

  4. Taxes – Many people mistakenly believe that taxes will be significantly less, or disappear entirely, when they retire. Unfortunately, that is typically not the case for those that will have additional income besides social security. Retirement income from traditional IRA’s, 401(k)’s, pensions, etc. are fully taxable at ordinary income tax rates. Additionally, for couples that file jointly and have over $32,000 in annual retirement income, including one-half of social security benefits, up to 50% of their social security benefit will be taxable. If their annual income exceeds $44,000, including one-half of social security benefits, up to 85% of their social security benefit will be taxable. Therefore, many people will have less usable retirement income than they expect due to the amount that they will lose to pay income taxes.

  5. Social Security – Current estimates project that, unless changes are made, social security will have a shortfall of funds around 2033. Although few experts believe that the system will fail, changes are likely in the future to help ensure its long-term sustainability. A combination of increasing social security payroll taxes, delaying the retirement age and reducing social security benefits and/or cost of living increases is a real possibility. Those who plan to retire on or after 2025 may be wise to plan for a reduction in social security benefits.

  6. Higher Medical Costs – Life expectancies continue to climb higher. One of the reasons people are living longer is that medical treatment has advanced significantly over the last several decades. However, those advancements also come with a higher cost. Fidelity Benefits Consulting estimates that a 65 year old couple retiring today will spend on average approximately $220,000 out-of-pocket on medical care over their retirement period.

A good Financial Advisor can help you develop a comprehensive financial plan, which can include detailed retirement planning that addresses the above issues, and can increase the probability that you will be able to achieve a comfortable and successful retirement at a reasonable age. A comprehensive retirement income plan will address the following:

  1. How to identify the safe withdrawal rate of their retirement savings that will optimize retirement income, as well as provide a high probability of not running out of money.

  2. How to diversify1 and stage assets, as they approach retirement, to reduce risk and preserve wealth.

  3. How much savings they will need to securely and comfortably retire and thereby establish a target retirement date.

  4. The appropriate strategy and age to begin collecting Social Security benefits.

  5. How to minimize taxes before and after retirement.

  6. How to develop and optimize a budget to increase the amount that can be saved for retirement, as well as reduce and more accurately estimate what their retirement living expenses will be.

  7. How much saving should be happening now in order to reach your retirement goal.

  8. The type of accounts and investments that will suit your goals and time horizons for retirement.

  9. The rate of return that should be targeted on their investments to be in-line with their risk tolerance and their retirement goal.

  10. How to reduce and/or eliminate debt which can dramatically improve their retirement outcome.

For those that may feel that they are behind in planning for their retirement; do not let that prevent you from getting started on your plan, since it is better to start late than to never start at all. A good retirement plan will often enable a person to make up a significant portion of the money shortfall that exists due to saving too little, starting late, or making investment mistakes.

Additionally, options such as working part-time after retirement or downsizing, to reduce expenses, can help those who are behind in planning for retirement. Working part-time after retiring from a full-time career is often considered being “semi-retired”. Many find that this is a good way to exit the demands of a full time stressful career, since it can enable a person to slow down and live a more leisurely lifestyle.

Lastly, just as it is critical to properly plan for the financial aspects of retirement, it can be important to plan for the physical and emotional aspects of retirement. Having well thought-out plans as to how you will spend your time, how you will fill the void left by work/coworkers and how you will keep your mind and body fit, can lead to a longer and more enjoyable retirement.

The retirement landscape has changed dramatically over the years. Although it is not easy, it is still possible to retire comfortably and with dignity at a reasonable age. Whatever your goal and vision for retirement may be, a Trilogy Financial Advisor can help you to get address the critical transition from asset accumulation to income planning. Once the issues surrounding this issue are thoroughly understood, then you can more easily understand the exact amount and mix of assets you will need to retire according to your plans and wishes.

  1Diversification helps you spread risk throughout your portfolio, so investments that do poorly may be balanced by others that do relatively better. Neither diversification nor rebalancing can ensure a profit or protect against a loss.

References:

  1. Social Security Website
  2. Fidelity Benefits Consulting

Advisory services provided by TrilogyCapital, Inc,. a Registered Investment Adviser. Separate advisory and securities services may be provided by National Planning Corporation (NPC), a SEC Registered Investment Adviser and broker-dealer. Member FINRA and SIPC. Certain registered representative with NPC are doing business under the name of Trilogy Financial. TrilogyCapital, Inc. and Trilogy Financial are affiliated by common ownership and are separate and unrelated to NPC. Please consult with your representative to confirm, on which company’s behalf services are being provided.