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Retirement Readiness 2

In the last column, we discussed the importance of planning for retirement and the various sources of retirement income. We also suggested that the average person should save between 12% - 15% of his or her income to accumulate enough money to provide a replacement income between 70% - 80% of pre- retirement income that will last through life expectancy. However, adhering blindly to average rules can result in possible deficiencies. There are many personal variables that impact how much money you will need, and how much you need to save, to reach your goal. So let’s explore some of these variables to help you take control of your retirement plan and manage risks that include longevity, health and long term care costs and inflation / purchasing power.

When will you retire? Will it be sooner or later? Do you have to retire or are you in control of determining the timing? Timing directly relates to how much you need to save. The earlier you want to retire the more money you will need and you will have less time to accumulate it. If you are retiring earlier than expected, is it because of an illness or premature job loss? This type of unexpected occurrence can be greatly detrimental to your retirement savings and may result in you having to alter your retirement lifestyle. When planning a savings deferral amount, be conservative and err on the high side, even if it is a stretch, in order to give you a hedge for the unexpected.

Where you plan to retire and what you plan to do in retirement directly drives the cost of living parameters. It is not unusual for retirees to seek states that have no income tax and that offer a lower cost of living environment. Some retirees will maintain two or more homes and some will sell everything and either rent or even buy a motorhome. A retiree’s level of activity and type of interests directly affects the required discretionary income. For example, the level and type of social activity can have large cost differentials. Events, sports, hobbies, travel and volunteer work should all be considered when you estimate your retirement income needs. Most planning software assumes a level income need that increases with inflation. In reality, retirement spending habits tend to shift throughout retirement. Health care costs tend to become a larger component of a retiree’s expenses as they get older and food costs, transportation and travel tend to become a smaller factor. Housing costs tend to stay the same, but the type of housing can shift as you age.

How healthy will you be in retirement? Your health is a significant determinant to the quality, cost and length of your retirement. Your health is directly impacted by life style choices throughout your life and biological hereditary aspects. You can control your choices and you should try to become more informed about your genetic predisposition. If we all knew our own personal life expectancy and health, it would be easier to plan the future! Consider that for the average 65 year old couple, there is a 1 in 4 chance that one member of the couple will live to age 97. (Source: The Human Mortality Database, University of California, Berkeley.) Manage your long term care risk by understanding your health predisposition, considering a long term care insurance policy and setting more money aside.

Contemplate all your retirement income sources including possible part time work and social security. Deciding when to begin taking social security affects the size of the benefit. Typically it is more beneficial to put it off as long as you can to generate a higher benefit particularly if you anticipate a longer life expectancy. The Social Security website has calculators to help you determine when to start your benefit; www.ssa.gov.

Once in retirement, having well-defined and coordinated withdrawal and investment strategies will help ensure that you will not outlive your money. The general rule of thumb is to withdraw about 4.5% annually to safeguard that your pool of money lasts. A higher withdrawal rate will deplete the pool of money sooner. A too conservative investment strategy risks not keeping up with your withdrawal rate and long term purchasing power. In many cases, it may be prudent to consider annuitizing some of your savings to generate a guaranteed lifetime income similar to a traditional pension. This approach will likely become increasingly more popular in the future.

Retirement tip: Most retirement plan websites offer planning tools that includes gap analysis and target savings goals. You can assess your personal status to determine if you are on track, and if not, possible remedies.

Presented by: Susan M. Stiles CFP®, AIF®,ChFC®, Stiles Financial Services, Inc., Edina, MN, provides advisory services to the Zinpro Retirement Plan and their employees. They can be contacted by phone or email; 952-988-0452, 866-401-7374, info@stilesfinancial.com. Stiles Financial Services, Inc. is a Registered Investment Advisor. Securities offered through Cambridge Investment Research, Inc. Member FINRA & SIPC. Advisory services offered through Cambridge Investment Research Advisors, a Registered Investment Advisor. Cambridge & Stiles Financial Services, Inc. are not affiliated.

© 2011 Stiles Financial Services Incorporated

 

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