Perhaps the most common question in retirement planning is, “Can I afford to retire?”
But this only scratches the surface. The real question dives deeper. Instead of asking if you can afford retirement, consider whether you can afford to support your ideal retirement lifestyle for the rest of your life?
The stakes just got higher.
So how can you build a comprehensive retirement plan that lets you retire comfortably and confidently in the future? It starts with exploring the present.
Retirement and COVID-19
Your retirement plan in 2019 will likely look radically different than your current retirement plan. The Covid-19 pandemic has impacted many people’s visions for retirement, leaving some retiring earlier than anticipated and others needing to work longer to recoup lost income or investments.
A recent survey from the National Institute on Retirement Security reported that over 50% of people are more concerned about achieving financial security in retirement due to COVID-19. Over one-third of participants admitted to re-thinking their retirement plans. Among those considering changes, 67% said they plan to retire later than expected.
Along with financial changes, the pandemic has also spurred many personal shifts in priorities. People are making more drastic life changes like moving to a new state, buying property, going all-in on romantic relationships, making a career change, and more.
Perhaps you’ve noticed these shifts in yourself. You realize you’re not happy working 80 hour weeks away from family, or you find the stuffy city air has catalyzed your retirement dreams by the water.
No matter what’s changed in your specific situation, it’s critical to embrace the personal and financial elements of your retirement plan. Here are some key factors to help you decide whether you can retire the way you envision.
1. Examine Your Income
You’ve been diligently saving your entire career, but is it enough to fully support you in retirement?
Plan for a Fixed Income
The best place to start is by understanding your guaranteed income: these are the fixed earnings you can count on monthly like a pension, Social Security, annuities, and cash.
If you have a defined benefit pension plan, fortune has smiled upon you. Pension plans are becoming more scarce with the rise of defined contribution plans like 401ks, 403bs, and 457s.
To determine how much your monthly pension check will be, you’ll need to choose from four different payout options:
- Single life – Often the highest monthly payments, but payments stop when you pass away.
- Joint life – Moderate monthly payments, but your selected beneficiary continues to receive payments after you pass. You can choose that your beneficiary receives 100%, 75%, or 50% of your monthly payments.
- Life with period certain – Payments last either for your lifetime or a set period, whichever is longer. For example, if you buy a 15-year term and outlive it, you’ll continue to receive monthly payments. If you pass away 10 years into the term, your beneficiary will receive total payments for the last 5 years of the period.
- Lump sum – Some companies offer a lump sum payout, but taking this option can come with important tax, cash flow, and longevity consequences.
Your payout selection factors into the final amount of your monthly check. Remember, single life options tend to come with the highest payments but don’t protect a spouse or loved one.
A significant portion of your retirement income, typically about 40%, will come from Social Security, making it critical to create a strategy to maximize it. One of the most significant decisions you can make is when you enroll in benefits. In general, there are three times to enroll: age 62, at full retirement age, and at 70.
The earliest you can collect Social Security benefits is 62. (There are several exceptions, like if you are a qualifying minor or dependent, have a disability, or are widowed). While it’s the most common option and provides quick access to your cash, collecting early does come with a significant drawback: you could see up to a 30% permanent reduction in benefits.
Waiting until you reach full retirement age (67 for those born in 1960 or later) allows you to collect 100% of your benefits, making it an excellent option for many.
You can also delay collecting benefits. By waiting, you accrue delayed retirement credits for every month after your full retirement age (FRA), up until age 70. You can see an 8% increase in your benefits for each year you wait, meaning those with a FRA of 67 could have a 24% benefits bump.
Various considerations factor in to the ideal time to take your benefits, including:
- Your current and future health (factor in pre-existing conditions)
- Family health history
- Spouse or dependents; married couples should create a Social Security plan that maximizes their benefits while alive and when one spouse passes away
- Income needs and tax bracket
- Lifestyle considerations
Interested in learning more about your benefits? Create a My Social Security account to access calculators and benefit estimation tools.
Annuities tend to have a certain reputation in the financial industry, but they can enhance your retirement plan depending on your circumstances.
Annuities are insurance products that provide guaranteed income for either a set period or life, depending on the policy. Many retirees use annuities to protect against the risk of outliving their savings.
Keep in mind these vehicles are complex. There are several rules, fees, and fine print to understand before signing on the dotted line. Be sure to work with a fiduciary financial advisor so you can be confident the advice you receive is genuinely in your best interest.
How much cash should you have in your retirement portfolio? As with most financial-related questions and answers, it depends. Many retirees benefit from retaining an emergency fund they can tap for unexpected health costs, home repairs, travel, or other spontaneous expenses. But beyond that, you should balance your cash holdings with other income channels.
Plan for a Variable Income
Fixed income isn’t the only way to generate income in retirement; you’ll also need to assess what you’ve collected in your investment and retirement-specific accounts.
Assess Your Portfolios
Start by examining your retirement-focused accounts.
- How much do you have in your traditional or Roth 401(k) and IRA?
- Are you contributing to your health savings account (HSA)? Remember, you can only actively contribute until you turn 65 (so dial up those savings!).
- Are you maxing out your contributions each year, including catch-ups? In 2021, you can contribute $26,000 in your 401(k) and $7,000 in your IRA if over 50. If you’re over 55, you can put up to $8,200 for family coverage and $4,600 for single coverage into your HSA. (Note: HSA contribution limits increase slightly in 2022.)
You may have other investment accounts to supplement your retirement savings. Look into the following:
- What are you currently contributing to your brokerage account(s)?
- Do you invest in physical real estate property?
- Does cryptocurrency play a role in your investments?
Understanding how much you have in your portfolio is one thing, but another problematic retirement hang-up is making that money last. Before you retire, you’ll want to consider how your investments will hold up against inflation.
- Do you have enough savings when anticipating 20+ years of inflation?
- How can you create a withdrawal plan that both maximizes your assets’ longevity and minimizes your tax liability?
Build a retirement withdrawal plan that takes these variables into account. Your financial advisor can help you create a strategy that makes sense for you.
Add Up The Total (and Build a Plan to Make Up the Difference)
Now it’s time for the fun part: adding everything up.
- What’s the total value of your nest egg, including both fixed and variable income sources?
- How will that value translate into consistent income in retirement?
- Does that number meet your income goals, or do you still have work to do to get there?
You’ll have a better sense of your financial readiness for retirement when you look at the whole picture. Consider your planned retirement expenses:
- Housing (mortgage, rent, maintenance, upgrades, etc.)
- Living expenses (utilities, internet, food)
- Entertainment (plus other “fun” spending like gifts to spoil your grandchildren)
- Debts (credit cards, auto loans, mortgage, etc.)
- Insurance (Medicare and corresponding costs, long-term care, life, homeowners, etc.)
- Travel and transportation
- Charitable giving
- Taxes (property, investments, income, etc.)
How much money do you need to fulfill all of those expenses each month? Is your nest egg close to meeting that goal?
If you find yourself a bit short, there are many things you can do to catch up. This includes maxing out investments each year, cutting and redirecting current spending to investments, allocating a lump-sum gift or inheritance to your portfolio, working an extra year or two, adjusting your lifestyle goals and spending habits, among other strategies. It’s essential to create a comprehensive retirement income plan with your advisor to determine if you have enough money to support your objectives.
2. Know Your Lifestyle Goals
Your lifestyle goals and values are the centerpieces of your retirement plan.
They inform how you spend your time and resources, making it an essential part of building a retirement strategy that works for you.
Everyone’s retirement lifestyle goals will be different, and those differences can drastically impact how costly your retirement plan could be. Someone who wants to retire abroad, for example, will have many additional financial considerations like housing, taxes, travel and transportation, entertainment, residency, and more.
Walking through the following questions can help clarify intent.
- Do you know where you want to live? Will that place involve a move? What new expenses can you expect, like moving costs, property taxes, taking out another mortgage, or allocating funds for rent?
- How will you intentionally create a new routine and fill your time? Do you want to work part-time or embark on an encore career? Will you regularly volunteer for a cause you care about? Do you want to go back to school and earn a degree, certificate, or other specialized training? How can you put your talents and hobbies to good use?
- How will you stay active? Retaining physical and mental strength is an incredible asset as you get older. Staying sharp can keep you healthier and improve your quality of life.
- Where will you find a community? Retirees can benefit significantly from a supportive and caring community; for you that might be family, friends, co-workers, and religious congregation members, among others.
Maybe you’ve always dreamed of retiring to a beach cottage where you can grow your own vegetables and work part-time at a downtown bookstore. Or perhaps you see yourself writing a novel and staying close to home. You may be keen on adventure and want to spend a few years traveling abroad.
No matter your goal, you’ll need to have clarity around what you want so you can adequately pay for it.
3. Create a Comprehensive Health Plan
It’s easy to daydream about lifestyle goals and how to fund them that, too often, planning for your future health gets overlooked. But your health in retirement should be far from a second thought.
Healthcare costs can be significant in your retirement budget – about 15%, according to Fidelity. They also estimate a healthy 65-year-old couple will need to save $300,000 (after tax) for medical costs in retirement.
While this number includes costs for Medicare premiums and other typical out-of-pocket expenses, it doesn’t include long-term care, which can run hundreds of thousands of dollars (depending on the type and length of care needed).
How can you plan better for your health in retirement?
Start by acquainting yourself with Medicare. Check out our previous article, which breaks down the Medicare basics. But for now, consider the following:
- Sign up for Original Medicare (Part A and B)
- Obtain Part D, prescription drug coverage
- Decide if a Medicare Advantage Plan (Part C) or a Supplemental plan would be best for you depending on your location, budget, health needs, and lifestyle goals
While Medicare can help cover health costs, it isn’t the end-all-be-all of coverage. You’ll have expenses for premiums, deductibles, co-pays or co-insurance, and other out-of-pocket costs.
So how can you plan to pay for it?
Perhaps the most lucrative and tax-friendly option is dipping into your HSA. HSA funds are designed to help cover medical costs and qualified distributions are tax-free. While you can’t contribute to your HSA after 65, you can still withdraw from it in retirement. You’ll likely also need to use regular investment distributions to cover ongoing medical expenses.
Work with an Advisor Who Sees the Full Picture
Creating a comprehensive retirement plan is no small feat, and there often isn’t a simple answer to the pressing question of, “Can I afford to retire?”
But if you know your ideal lifestyle (and what it costs), you should be able to generate a detailed savings and investment plan that aligns with a targeted retirement date.
Our advisors at Abacus love helping clients create retirement plans that honor their values and help them expand what’s possible with money. Ready to explore your retirement possibilities? Reach out and schedule a call with to our team today.