If you’re planning for your retirement, affording your retirement is the main concern. Today, there are three main components to this.
The first being how much retirement will cost.
The second being social security.
The third being preserving the wealth you earn.
If you know how much your retirement will cost, understand the current health of the social security system, and know how to preserve your wealth, you will be well prepared for your retirement!
How much does retirement cost?
You’ve probably seen projections that estimate anywhere from 60% to 90% of your current income may be needed as your retirement income. But this approach, while simple, may give you an unrealistic idea of what you potentially might need. Instead, look at your current expenses and decide which of those are expected to remain after you retire.
It’s important to be realistic about your “basic needs.“ You might not think of listing things like pet care, yard maintenance, and regular visits to salons or spas. But if you enjoy those services now, you may want them during retirement, and you might find that you underestimated the real cost of maintaining your desired lifestyle. In addition, gifts to children and grandchildren — as well as financial help for these dependents — may represent an expenditure during retirement years. All of these “basic needs“ should be accounted for in advance.
Remember, even though you enter a new phase of life, you remain the same person!
In addition, make a realistic assessment of your activities during retirement. What goals or hobbies do you intend to pursue, and how expensive do you anticipate they will be?
Finally, many of us have special circumstances that may require additional resources during retirement, and these must be factored in.
The next step is to account for other income sources such as Social Security and pensions. With these sources of income in mind, figure out how much income you can safely take from your portfolio accounts. To estimate how much each may potentially provide, take a look at your most recent statement.
With these numbers in hand, estimating any shortfall you may have is a matter of subtraction. That is, subtract the income you anticipate from your estimate from the income you may need in order to maintain the lifestyle you want.
You may want to account for economic factors that can impact your retirement portfolio’s performance. Also, taxes, inflation, and investment risk may have a role to play.
Keep in mind the estimates and guidelines suggested are for informational purposes only and should not be considered a substitute for a more comprehensive review.
How healthy is the social security program?
As the baby-boom generation ages, there is a potential that Social Security benefits may decrease—or the age at which an individual can collect benefits may also increase. Changes in employment may affect retirement plans. As a result, the third leg of the stool, savings and investments, may become even more important.
Social Security is facing a major challenge. The number of people who are expected to depend on benefits is increasing as the number of people paying into the system is decreasing. As the chart shows, the over-65 population has been increasing steadily for the past 100 years.
And that upward curve is expected to get a bit steeper now that the baby boomers are entering retirement.
In 2018, the Social Security Administration reported paying out more than it took in for the first time in decades. If no changes are made, the trust fund is expected to be completely exhausted by 2034. The coronavirus could speed this up to 2032.
For years, Congress has considered proposals to make changes to Social Security. No one’s certain what Congress may do, but one option could be to raise the age at which retirees become eligible for benefits. Another might be to reduce benefits.
Whatever the case, Social Security may not be able to provide enough to be an individual’s sole source of retirement income.
How do I protect capital in my portfolio?
Many investors place a portion of their portfolio in a position designed to protect principal. This is a secure portion that is exposed to little market risk.
Among the more common investments in this class are money market funds, Certificates of Deposit, and U.S Treasury bills, which are backed by the full faith and credit of the U.S. government as to the timely payment of principal and interest. If a Treasury bill is sold prior to maturity, there is the opportunity for capital loss or capital gain, depending on the interest rate environment.
Keeping too much of a portfolio in secure investments exposes a person to another risk: inflation. Low risk investments tend to generate low rates of return. And over some periods, low-risk, low-return investments may fail to keep pace with inflation, especially with interest rates being at historic lows.
Everyone’s situation is unique. This information is not intended to be a substitute for specific individualized legal advice, and we suggest you discuss your specific situation with a qualified legal advisor. As always, feel free to contact us with any questions as to how these issues may fit into your overall financial plan!