The
“million dollar” question many of those preparing for retirement ask themselves
is simply stated but not necessarily easy to answer – “how much money do I need
to save to secure a comfortable retirement?” In some circles, this is referred
to as “the number” – that magical figure that tells pre-retirees how prepared
they may be.
A
recent survey from Ameriprise Financial found that working Americans ages 50-70
with at least $100,000 in investable assets estimated that what they needed to
comfortably retire was, on average, $930,000.*
But
what does that number really mean? How important is it? What assumptions must
you make to arrive at a number – and how many rapidly changing factors impact
your number? Preparing for retirement is about much more than arriving at a
number, but some calculation is necessary.
Calculate your retirement
expenses
When
determining how much you’ll need to save for retirement, it’s helpful to think
in terms of how much income you’ll need to withdraw to cover expenses. But projecting
future spending is an inexact science at best. Some expenses might go away
(mortgage, FICA taxes, retirement plan contributions), but you may also have
more time and energy to spend money on the things you need and want to do in
retirement. There are also expenses that could greatly increase in retirement
like medical costs.
Using
your current spending habits as a starting point, draw up a realistic list of anticipated
living costs in retirement. There are two primary categories to review in this
regard:
Essential expenses
These
are the required costs associated with daily living – food, shelter, utilities,
transportation, insurance (health, life, long-term care) and taxes – that most
likely will persist throughout retirement.
Lifestyle expenses
This
is the “fun” part of retirement – interests that you want to pursue such as
golfing, travel, owning a vacation property or starting a business. To make
these lifestyle choices a reality, enough money needs to be in place to finance
them. But separating out lifestyle expenses from required expenses can help you
prioritize using funds from your nest egg too quickly and jeopardizing your
long-term financial security. Note that spending on lifestyle needs can be
adjusted as needed throughout retirement, as these are considered discretionary
expenses.
Match assets to
expenses
Rather
than trying to assess whether a single lump sum amount is sufficient to meet
income needs in retirement, a more practical approach may be to match specific
assets (or sources of income) to various expenses.
The
highest priority is the essential expenses category. Your goal should be to
enter retirement with a virtual guarantee that required living costs are going
to be met without interruption no matter how long you live. There are two clear
sources of guaranteed income for retirement: Social Security and a defined
benefit plan - when available. Of course if you’re still far from retirement,
Social Security shouldn’t necessarily be viewed as a long-term guaranteed
source of income due to potential changes as budget discussions unfold in
Washington. If these income sources don’t produce enough income to meet
required expenses over time, additional income could be generated in another
way such as an annuity providing a guaranteed income stream. Note that using
this approach, future income is not subject to the variability of the markets1.
Your
remaining available assets can be used to fund lifestyle expenses. You may
choose to invest this money more actively with a strategy of drawing down
assets over time using a sustainable withdrawal rate.
A
true number may be elusive, but using this process, you may have a better sense
of what your ultimate savings goal is. It may be useful to set multiple goals –
or “numbers” – to reach enough to cover essential expenses and then lifestyle
expenses. Beyond these goals, you might also consider the amount you’ll need to
cover unexpected expenses in retirement and to leave a legacy.
Planning
financially for retirement can be complex. Taking the appropriate steps to
calculate your retirement income needs is a great first step, but with an
economic and political environment that is constantly evolving, it can become
even more complicated as you near retirement. Consider working with a financial
professional who can help you work toward your short- and long-term goals.
Renée A. Hanson, CFP®, CEP®, CDFA™, CFS, is a private
wealth advisor with Hanson, Ayala & Associates, a private wealth advisory
practice of Ameriprise Financial Services, Inc. Her passion is in helping women
achieve their dreams and financial goals, regardless of life’s many obstacles.
Renée is licensed/registered to do business with U.S. residents only in the
states of AZ, CA, CO, GA, IA, IL, MI, MN, MT, NH, NJ, NM, NY, OH, PA, SC, TX,
VA, WA, WI. Please visit: www.reneehanson.com to learn more.
*
The Retirement Check-In® survey was created by Ameriprise Financial utilizing survey
responses from 1,000 employed
Americans ages 50-70. All respondents have investable assets of at least
$100,000 (including employer retirement plans, but not real estate) and are
planning to retire at some point. The survey was commissioned by Ameriprise
Financial, Inc. and conducted via telephone interviews by Koski research from
October 31- November 14, 2012. The survey was conducted among a targeted sample of households. Cell
phones were approximately 25 percent of the sample. The margin of error is +/-
3 percentage points.
1
However, inflation risk may remain, depending to some extent on the features of
the specific annuity.
Annuities are not government or FDIC insured. All guarantees are
based solely on the continued claims-paying ability of the issuing company.
Ameriprise Financial cannot guarantee future financial results.
Brokerage,
investment and financial advisory services are made available through
Ameriprise Financial Services, Inc. Member FINRA and SIPC.
©
2013 Ameriprise Financial, Inc. All rights reserved. File
# 657903
No comments:
Post a Comment