By Frederick “Rick” Fisher, MS, CFP®
The article was originally published in The Union. Download the PDF.
With Baby Boomers retiring at a record pace, we have been busy meeting with prospects and clients alike to discuss retirement planning. We have found that once people get within five years of retirement, they become more interested in the finer details.
One such hypothetical couple were John and Kim. Both were in their mid to late fifties and were hoping to retire at 60-62 years old. Their primary concern was if they were on track to do so.
They needed to consider five things:
1. How much money will you need for your retirement lifestyle?
First, determine how much money is needed for the desired retirement lifestyle. To do this, we recommend tracking spending to establish budget targets.
2. What are your sources of retirement income?
Next, identify all sources of income in retirement. This includes all pension types, the most common being social security.
3. Review the size and allocation of your portfolio.
In addition, review the size and allocation of the rest of the retirement portfolio. Is it large enough to generate needed income to add to any pension income? Try a conservative approach: take the current value of all retirement and investment accounts and multiply by 3%. John and Kim had two IRAs, one 401(k), two Roth IRAs, and a trust investment account, totaling $825,000. If they were to draw a conservative 3% from those accounts today, they would create about $25,000 in annual income.
This, along with their estimated social security income of $30,000, was short of the $75,000 target for their desired retirement income, so we discussed options to close the gap. How much should they save over the next five years to get their retirement portfolio to the size needed to generate $45,000 in income? They did not see $1.5 million as realistic given their current cash flow. An option was to draw at a higher percentage, but risk having the principal shrink over time. Using a 4% withdrawal rate reduced that goal to $1.125 million; a 5% rate to $900,000. These findings gave them hope, but they didn’t like the risk level.
4. Consider part-time work.
Another option is to work part time in retirement. Would one or both of them consider working 2-3 days per week to close the income gap?
We let John and Kim know that many retirees return to work in a field they love, and more for the activity than the money. Both hadn’t thought of the idea but would consider it.
5. How will your expenses change in retirement?
The last thing we discussed was how their expenses would change once in retirement. Some budget items would decrease, like commuting expenses. Others would increase, like healthcare.
With these five points, John and Kim were better able to plan out the next five years before retirement.
If you are considering retirement and want a check up on your current plan, talk to your financial advisor or give us a call at 530-273-4425 for a review that will help you think beyond investments.
This is a hypothetical situation based on real life examples. Names and circumstances have been changed. The opinions voiced in this article are for general information only and are not intended to provide specific advice or recommendations for any individual.
Frederick Fisher is a Registered Representative with, and Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Ostrofe Financial Consultants, Inc., a Registered Investment Advisor and separate entity from LPL Financial.
For questions or suggestions, contact Frederick at (530) 273-4425, or firstname.lastname@example.org, or visit ostrofefinancial.com. Branch address: 565 Brunswick Road, Ste. 15, Grass Valley.
Published in The Union, September 2018