What’s Your Retirement Number?
Numbers rule our retirement decisions, and we usually have questions about them. At what age will we stop working full time? How long of a retirement should we plan for? What do today’s low interest rates mean to our future income? Can we count on a reasonable dividend yield from our stock portfolio? What percentage of our income should be guaranteed for life, through Social Security, pension income and annuity payments?
We also look at retirement income as both dollar amounts and percentages. Should we try to replace 100% of our former income during retirement? Or should we set a fixed budget and find a way to meet that amount?
— Jeff Powell, managing partner and chief investment officer for Polaris Wealth Advisory Group, which is headquartered in San Rafael, California.
You can determine which approach appeals
to you by thinking about your last mortgage refinance. Did you
congratulate yourself
for shaving a percentage
point or two off the
mortgage rate, or plan
for ways to spend the
extra $300 you saved
every month?
The 4% rule is another percentage, and it looms over the majority of retirement decisions. This is the rule that says people with a reasonable amount of savings when they retire should be able to make that pot of money last for 30 years even as they remove 4% of the total each year for living expenses. Studies have shown that three-quarters of all financial advisers rely on the 4% rule when offering guidance to their clients.
Don’t Just Go by the 4% Rule
Your
Finances
Dollars or percentages
Common retirement measure: 4% rule for starting income percentage
There’s just one problem. Baby Boomers retired last year at the rate of about 8,800 a day, or 3.2 million a year. And one size does not fit 3.2 million people. In fact, it is reasonable to think that every one of those retirees will seek a number that is right for them as they customize their retirement income plan to their specific needs. Further, the number is dependent on market conditions. When Wade Pfau, a financial academic, was asked whether the 4% rule still applies, he suggested that while it worked historically, it never dealt with the current low interest rates and high stock market valuations at the same time.
Your age, gender and marital status, all of which impact the life expectancy of your plan.
Checking account
Retirement account such as a 401(k) or IRA
College savings account such as a 529 plan
Rewards credit card
— Galen Bargerstock, president of Government & Civil Employee Services LLC in Indiana, Pennsylvania.
"Look for everything you have and put it all in one place."
No ordinary rule based on averages can replace the factors you need to consider when figuring out how much income your savings can generate. Those factors include:
To illustrate, the chart below shows the impact of just three variables — age, gender and marital status — on what a viable starting income percentage could be for you using the Income Allocation planning method and typical savings makeup and legacy objectives.
Your starting income percentage is unique
to you
You can see that, unlike the general 4% rule, a recommended Starting Income Percentage (SIP) can vary from a high of 5.26% to a low of 4.39%, even before we take other factors into account. Our point is not that it’s higher than the 4% rule, it’s that it’s personalized to the individual. Further, even though it’s more customized, you need to drill down and find out what’s behind the Income Allocation numbers.
What’s behind the SIP?
Analyzing the Starting Income Percentage (SIP) and getting the most out of it can make a significant difference in your retirement. For example, if a plan customized for you delivers just 1% more in income per year from your $1 million in savings, that’s $10,000 more to spend in your first year of retirement, or — with 2% annual increase — an additional $337,000 over 25 years.
And it’s not enough to select a plan based on whether the number is higher or lower. What you need is a plan that provides you information as an informed investor:
1
That avoids comingling cash and reduces the temptation to spend money intended for different purposes.
Keep log-in information for accounts in a folder to make it easy to access information and keep track of where money is stored.
Reconsider Investments
Don't overlook the importance of simplifying investments as well. Unless you're a sophisticated investor with lots of money, there is likely little reason to have more than one brokerage account, Chamberlin says.
Using multiple accounts could make it difficult to ensure you have the proper mix of investments to meet your goals and match your risk tolerance. Plus, using more than one financial advisor could result in conflicting advice.
Chamberlin recommends people also review the funds where their money is invested. "A lot of people have multiple mutual funds that have the same
objective," he says. It may be easier – and cheaper – to put money in two to three low-cost ETFs instead.
Use a Comprehensive Money Management App
Once you have your accounts organized, investments streamlined and monthly payments automated, use an app to keep tabs on everything going forward.
Your financial adviser may be able to provide access to the eMoney app, Chamberlin says. While the software is designed for professionals, it includes a client portal that allows people to securely store sensitive documents, aggregate accounts and track progress toward goals.
However, eMoney is only one option. Many of the best budgeting apps, such as Mint and Personal Capital, provide robust money management tools. They offer a simple way to oversee your simplified finances.
This infographic was designed by Avalaunch Media
Sharpen your focus before making your retirement plan
Kiplinger
Answering these three questions will help you get down to the basics of what is most important to you about your retirement years.
Sharpen your focus before making your retirement plan
Read Article
Read Article
Market returns, interest and dividend
rates, and inflation expectations.
Your legacy objectives for your
kids and grandkids.
Where your savings are invested: rollover IRA versus personal (after-tax) savings or even equity in your home.
Your attitude toward taxes, both current and proposed.
What is my projected income, and what are the sources of that income?
2
What percentage of my income is safe and not dependent on market returns?
3
What are my projected savings, how much liquidity do I have, and what’s the legacy?
4
What are the economic assumptions underlying these projections?
Don’t be put off by the technical-sounding nature of these questions. It’s important that you get a report on your plan, review it yourself or review it with an adviser. That review can give you confidence — or not — in your number.
Starting Income Percentage as a Function of Age and Gender