Financial planning for pre-retirees
“How much money do we need?”
That is the big question. Isn’t it?
We think a more appropriate question is,
“Will our money produce sufficient income to maintain our standard of living without jeopardizing longevity?
There are many risks to retirement savings. Some of them may be familiar to you, such as inflation and market losses. Some of them may be new to you, like sequence of returns risk.
Factors that may impact your financial longevity.
Most people are familiar with this type of retirement risk. This refers to the gains and, sometimes losses, associated with investing assets in the securities market.
Market Risk
52% of people turning age 65 will need some type of long-term care services in their lifetime. Can your retirement savings survive that financial burden? Many pre-retirees choose to protect their nest egg by investing in long-term care insurance.
Long-term Care
Over the last 60 years, inflation has averaged 3.7%. Ideally, the income from your assets should offset inflation during retirement.
Inflation
Your social security benefit will grow the longer you wait to start taking it. You can use this free estimation tool to see how your benefit will change depending on what age you begin to take it.
Social Security Income
People are becoming more aware of the importance of tax planning in their retirement plan. Federal and state income taxes will depend on your location and the type of assets you incorporate into your portfolio. Property taxes are a major consideration when it comes to expenditures in retirement.
Taxes
The 4% rule was developed in 1994, when the average yields on bond indexed mutual funds stayed around 6.6%. Today, we are working with yields closer to 2.4%. This outdated rule also doesn't consider taxes or inflation, which has averaged 3.7% over the last 60 years.
In an academic paper published by the Journal of Financial Planning the authors state that, "if current bond returns don’t spring back to their historical average until ten years from now, up to 32% of nest eggs would evaporate early."
We recommend a more holistic approach to offset the various risks to your retirement plan.
Why can’t we just rely on the 4% rule?
It may be time to de-risk your portfolio.
Risk Tolerance
This reflects your willingness to accept the gains and losses associated with market performance.
Risk Capacity
This reflects your ability to recoup your losses in your portfolio after a market dip without changing your plans.
Regardless of your risk tolerance, which can fluctuate depending on personality and circumstances, risk capacity is more predictable and diminishes in the years leading to retirement.
Do you know how much risk capacity your portfolio has?
But I already have an advisor and a retirement plan.
And we are glad that you do.
But we always recommend that you explore your options to ensure that your retirement accumulation and distribution plan is the best fit for your specific goals.
Because it is not just about how much money you need, but how you will safeguard your plan and draw on assets to make your money, and legacy, last.
Seek a second opinion.
Just as you ask around before committing to an expensive vehicle repair or large-scale home remodel, we believe in that you should ask around before committing to a financial plan.
Interested in a free retirement needs analysis and initial consultation?