This material was prepared for Kevin Mote, LPL Financial Advisor, use.
As an empty nester, there are probably few days that go by where you don’t ask yourself – can I afford to retire? This has, no doubt, been amplified by the economic challenges of the past few years, including vanishing pensions and dwindling 401(k) savings.
How much is enough?
Having enough money to maintain living standards in retirement is becoming increasingly difficult. The Center for Retirement Research recently developed a National Retirement Risk Index (NRRI) that measures the share of U.S. households “at risk” of being unable to maintain their pre-retirement standard during retirement.
The study has zeroed in on 5 key findings:
- The retirement landscape is going through significant changes, increasing the challenges baby boomers and generation Xers will face when they retire.
- 51 percent of households are at risk of not having enough savings to maintain their current living standards.
- When health care is included in the Index, this number rises to 61 percent.
- Incorporating long-term care costs further increases the Index to 65 percent.
- Saving more and working longer may improve this outlook.
Such trends not only make it more difficult to build savings, they also create more uncertainty as you near retirement age. We’ve put together some tips for empty nesters about to retire:
Carefully decide when to retire
Many Americans retire when they are 65. But it is often beneficial to wait a few more years before exiting the work force. This doesn’t only mean you have fewer years of retirement to fund. It also means you can earn your full Social Security benefits. (The 1983 Social Security Amendment included a provision for raising the full retirement age for people born in 1938 or later. To calculate your full retirement age, visit the Social Security website.)
Deciding when to retire is a pivotal part of determining if you have enough savings to maintain your current living standard. Before you determine when you will retire, analyze your spending habits and determine how your retirement income will cover those expenses. For example, is your mortgage fully paid off? How will you cover insurance costs? Real-estate taxes? What about other expenditures, such as travel, gifts etc? This type of analysis will allow you to figure out the best retirement age for your situation.
The internet is full of retirement calculators that can help you determine if your savings are on track. This retirement calculator from MidWestOne Investment Services will help you create a retirement plan and view your projected retirement savings balance and withdrawals for each year until the end of your retirement.
Figure out how much to withdraw
The rule of thumb for many years has been to draw down your financial assets by no more than 4 percent in your first year of retirement. In the subsequent years, take the dollar figure from the first year and increase it by the inflation rate. Let’s say, for example, that you retire with $900,000. That means you could spend $36,000 in your first year of retirement ($900,000 x4%=$36,000). Assuming inflation during the year is 2%, you could then spend $36,720 in your second year of retirement ($36,000 + ($36,000 x2%)=$16,320)
While everyone’s situation is unique, sticking to this approach generally ensures that your assets will last as long as you will live. If you withdraw more you run the risk of potentially running out of money.
Generate an income stream
To generate an income stream during retirement, most people rely on payments produced by:
- Social Security
- Withdrawals from an equity portfolio
- Or a combination of these items
The selection of these income streams begins with a review of your tax situation, as taxes play a role in determining when and how much income should be taken in the form of distributions from 401(k) plans and other tax-deferred investments.
One key question is what percentage of assets to keep in stocks. The answer depends heavily on your circumstances and goals. Stocks are riskier, but often offer greater growth potential than bonds and other savings tools.
Another key question is whether to annuitize a portion of your savings and if so, when? Placing a chunk of your nest egg in an annuity guarantees a stream of income* for life and can provide a measure of certainty in an overall plan. The disadvantage: Purchasers lose direct control of that money.
When it comes to planning out your retirement there are a lot of variables that come into play. Sit down with a trusted financial advisor to determine the suitable strategy for your unique situation.
Kevin Mote is a LPL Financial Advisor at MidWestOne Investment Services. He specializes in investments and retirement planning.
*Guarantees are based on the claims-paying ability of the issuing insurance company.
Stock investing involves risk, including loss of principal.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate to you, consult your financial advisor prior to investing.
MidWestOne Bank and MidWestOne Investment Services are not registered broker/dealers and are not affiliated with LPL Financial.
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