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Retirement Planning: Key Considerations

 

The concept of retirement is stressful for many people. Retiring in and of itself can be worrisome because it essentially entails a life where you no longer work yet you still need to support yourself. In addition to worrying about money, others wonder how they will fill the time.

As such, the possibility of being bored or unstimulated makes the thought of leaving their work lives behind even more of an issue and a stressor. Even so, the pandemic has either forced many people to retire suddenly as a result of unexpected job loss as well as putting people in a situation where they’ll willingly retire because their jobs aren’t the same as they used to be. 

These considerations among many others bring us to the question of how much is enough when it comes to retirement savings?

What to expect when planning for retirement 

For a long time, the savings paradigm has been the 4% rule, which is designed with 30 years of retirement in mind. According to the 4% rule, it is expected that the retiree will withdraw 4% of his or her total savings, as adjusted for the current cost of living, during each of those 30 years.

While this sounds simple and straightforward, the 4% rule still does not take a number of factors into consideration, including the following:

  • Retirement tends to be a succession of phases that are tailored to individuals, all of whom have their own spending needs, budgets and priorities. 
  • The point of saving for retirement is to prepare for a certain amount of money that you will need in a savings account in order to comfortably pay for any and all necessary or discretionary expenses once you stop working. 
  • There is a significant emotional component involved in saving for retirement. You’ll go from watching your savings account balance increase throughout your life to spending more than you save as you settle into retirement. Seeing the total value of your savings decline over time can be unsettling, even though that was the intent.
  • While most people expect to retire by the age of 62, there are many factors that can impact this timeline. For instance, a recent survey found that approximately 46% of generation Y, 45% of generation X and 30% of baby boomers are of the opinion that a financially secure retirement is out of reach in present time. 
  • How will the money you save be attributed to non-negotiable expenses versus discretionary expenses? Are first-class cruises on a consistent basis part of your plans? Or are you planning to stay close to home and travel less frequently? Maybe you are thinking of finding balance between the two possibilities. No matter what you choose, a recent survey has shown that the average household spending dropped from $64,162 for those under the age of 55 to about $39,652 for those 75 and older. 
  • According to a recent Consumer Expenditure Survey that was published by the U.S. Bureau of Labor Statistics, these are the average payments of your typical retiree household: 
    • Housing expenses: $17,454 per year or $1,455 per month. 
    • Transportation: $6,819 per year or $568 per month. 
    • Healthcare: $6,749 per year or $562 per month. 
    • Food: $6,137 per year or $511 per month. 
    • Utilities: $3,797 per year or $316.42 per month.

Of these aforementioned costs, expenses associated with healthcare are often the most variable and unpredictable. According to certain estimates, the average 65-year-old retired couple can often expect to spend somewhere around $300,000 on healthcare alone, especially because elderly folks must consider the possibility of needing to pay for long-term care. 

The key to planning for retirement is being prepared 

The key to understanding what your expenses will be in retirement requires good planning—and asking the right questions, for example:

  • How much money do you think you will need when it comes to discretionary expenses?
  • Should you focus on paying off your mortgage prior to prioritizing your retirement?
  • Would it make more sense for you to move elsewhere, like to a lower-tax state?
  • Are there any underlying health conditions that should be taken into consideration?
  • Do you know what your life expectancy is?
  • What is your current and realistic timeline for retirement?
  • How will this timeline affect your investment strategy?
  • What is your risk tolerance and what impact will it have on your investment strategy?
  • How will the following factors impact the amount of money you can withdraw?
    • Social Security
    • Pensions 
    • Annuity income
    • Additional non-portfolio income 
  • Will the alterations that the SECURE Act made to the RMD calculation affect how much money you will be required to withdraw?
  • Are there any taxes or fees that you should anticipate having to pay?
  • How will your circumstances be impacted by a 30-year timeline? 
  • Are you aware that the rigid 4% rule does not consider timelines outside of 30-year timelines? 

Be flexible when preparing your retirement plans 

Planning for the future is not supposed to be a process where you create a plan that is fully set in stone. While it would be ideal for plans to always unfold in the exact way you plan for them to and want them to play out, planning for the future requires flexibility. 

Your retirement plan will need to be reevaluated and adjusted as situations change over time. Whether you experience an unexpected life event or the rate of return on your investments changes, you’ll need to revisit your retirement plans and tailor them to the new situation. As a result, remain as flexible as possible when planning for retirement.  

All in all, planning for retirement takes work, but make sure you have fun with the process as well. By combining a knack for being prepared with the ability to be flexible, you might just find the process of retirement planning to be enjoyable!  

 
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