How much do I need to retire? is a common question that I hear, and it’s a really important one.
Recently, I was reading a blog from popular financial person Dave Ramsey, and he was weighing in on the subject of retirement. I think Dave helps so many people when it comes to debt elimination and figuring out the baby steps in saving. He does great work there, but when it comes to retirement planning, in my opinion, you might want to think twice about implementing some of the advice that he gives. I’m going to go over it with you today and why you might want to be careful and what you can do instead to put yourself in a better position.
First of all, realistically, you don’t want to implement anybody’s advice without meeting with them and considering your specific situation. I would much prefer doing that versus listening to someone on YouTube, or somewhere else, on what you should be doing with your money. So, talk to someone that you trust.
Anyway, as I was looking at Dave’s blog and what he thought about this, he says that if you’re able to live on 8% of your nest egg, and if your mutual funds can do 12%, you’ll have 4% to cover inflation. Okay; that makes sense – if you want to live on 40K, he says, you need $500,000 in the bank. So, take your total nest egg and divide it by 0.08 to get that number you’ll need to live on each month.
This is, in my opinion, a little bit risky. And here’s why:
The Sequence of Return Risk
What this means is that someone who retires in 2007 and someone who retires in 2010 are going to have drastically different outcomes of their retirement. If they were taking the same amount and their investments did the same thing, the outcomes, because of the withdrawal rates, have a big difference.
Applying this to our example: if you’ve got 500K and you’re taking out 40K, an 8% withdrawal, and you’re averaging 12% somehow, but let’s say it’s 2007 and then the financial crisis happens. What if the investments, because you’re invested aggressively, get cut in half but you still need 40K to live? Now you’re taking out 16% and that could really crash a plan, so that’s something to be careful about.
Regarding this idea of the 12% rate of return on mutual funds, if you’re achieving that sort of return, my thought is that you’d have to be invested pretty aggressively. Many people who are in retirement don’t feel comfortable taking that sort of risk and going along with the rollercoaster that comes with investing in equities – especially looking at 2020 and what happened in March – because there’s fluctuations that happen.
People in retirement don’t always want to do that, so a lot of times we’ll bring up the three-bucket strategy as a possible retirement withdrawal strategy.
Let’s look at an example of a 500K nest egg to start that first year in 2020. And in this scenario, achieving a 12% return and taking out 8%, that plan looks successful and you’re actually growing your assets in retirement; fantastic.
But what if you were off by 5K of expenses; what if you really needed 45K per year instead of 40? That’s a big difference that drastically impacts your plan. And what if you were right: you needed 40K a year. But what if instead of 12% you only got 10%, how does that impact the plan? Those are just a couple of reasons why you might want to be careful when planning and make sure that you talk with a professional to map it out and think of all the different scenarios.
And if this isn’t the best way, then what is a good way to go?
Decide how much you need each month
Estimate how much you might be having come in from social security and other pensions, other guaranteed income sources, and then subtract that from the monthly amount in step one
Take the number from step one and minus the number from step two, and then divide that number by 0.04, which is a more reasonable 4% withdrawal rate
But again, this is still basic. The 4% withdrawal rate isn’t bulletproof, it’s an opinion, it’s a financial withdrawal strategy out there. I recommend meeting with someone and specifically looking over your scenarios, just yours and not anybody else’s. A lot really depends on the money that you have invested and the withdrawal rate that you’re using.
As advisors, we’ve helped hundreds of people plan retirement, and we know that the more specific you can get in your plan, the more peace of mind you’ll have in retirement. If you’re interested in more peace of mind, reach out to me and I can help create your streamlined retirement blueprint, or I can give you The Perfect Retirement Plan that can help walk you through steps to take for your own retirement plan.
There’s so much conflicting advice out there when it comes to this topic. If you’ve got questions or you just want to talk to someone live, click on the link at the end of this post and I’d be glad to talk about your specific situation and ideas for social security.
If you’re thinking about claiming social security before your full retirement age, here are three things that could hurt you, that you might want to pay attention to.
You plan to continue to work before your full retirement age. Currently in 2020, if you make more than about $18,000 per year in wages, and you receive social security, that social security benefit could be reduced. They might deduct as much as $1 for every $2 you earn above that $18,000 limit. So if you plan on earning an income either from work or from self-employment before your full retirement age, think twice about claiming early.
You don’t have a lot in retirement savings. The average earner typically receives about 40% of their former wage from social security, but it’s common for retirees to need about 80-90% of their previous income just to live comfortably. Those with savings can supplement that extra need. But if you don’t have that option, then it might be a mistake to claim early because it’s going to permanently reduce that benefit that you could receive.
You have a chance at living a long life – hopefully you do. And if you anticipate living a long life, then it may not make sense to cut your social security benefit by claiming it early at 62. Because when you do that, you permanently reduce the monthly benefit.
As an example, the percentage reduction is about 30% if you were to take it early at 62 versus waiting for full retirement age. So this means if you’re entitled to about $1,500 per month from social security at full retirement age, then that might just mean you’re getting just a thousand bucks per month at age 62.
In some cases, filing for benefits early is a smart move and it can make a lot of sense. But if any of the above scenarios that I just mentioned apply to you, then you might want to be thinking about waiting instead. And if you’d like to talk about social security or retirement income planning, then click on the link here or reach out to me and I’d be glad to have a free meeting with you or give you a free copy of The Perfect Retirement Plan so that you can start to evaluate some of these things yourself.
Your retirement plan is not valuable, but the continual process of planning is, so step one is to create a flexible, adaptable retirement plan, not a static one.
What I mean by adaptable is a successful and secure retirement plan with investable assets each year until well into your nineties, as with the example shown in the video.
Now we know that life isn’t static and you and I both know that things change, life changes. So your plan should be able to change too and to adapt on the fly.
Now, what if the unexpected happens; an additional expense that we didn’t plan for? How does that impact a decision made today or next year? How does that impact the long-term plan?
Let’s say that you sell your business earlier than planned and you retire early. How does that impact the long-term plan?
Or you’ve got a family, you’ve got grandkids, you want to take them on vacations while you still can. How does that impact if you were to spend $20,000 per year to go to the lake house or go to North Carolina, whatever it may be.
So there’s all these different things and things we don’t even know that are going to happen yet.
The main point is that when life changes, let’s change the plan. And if we have an idea of what could come, let’s see what sort of impact that has on the long-term plan. So I hope that gave you a good picture of how to create a plan that’s flexible and that’s adaptable.
These 5 mini-plans make up every successful retirement plan. A retirement plan is not something to take lightly. What you put away now, and where you put it, can greatly impact how much security you will have later on in life when you are looking to retire. When developing a retirement plan, there are a lot of aspects to consider. What will your income look like? How will taxes play into it? What happens if later on in life you face medical complications. There is no way of knowing these things ahead of time, but there are plenty of ways to plan for them so that when the time comes, you will be able to face surprises down the road with some peace of mind. There are five mini plans that we include in an overall retirement plan to help round the plan out and cover all necessary bases.
This plan is important to ensure that when you are ready to retire, you can count on a reasonable and stable income to cover your month to month expenses. There are a variety of components to this plan including, but not limited to: social security, maximization, spousal planning, and investment income. This plan is foundational to retirement, as it ensures that you will be able to maintain a comfortable lifestyle, even when you are no longer actively working.
2. Investment Plan
All our investment plans are based on your Income Plan. The two work in unison.
The traditional retirement planning industry commonly decides how to invest your money based on your “risk tolerance”. We think this a deeply flawed approach that leads to higher than needed worry during major market corrections.
Instead, if we can find the right cashflow needed from investments, we can map out the next 10 years need and design the income plan so you don’t market fluctuations do not affect your income plan.
3. Tax Plan
Whether you are retired or not, you better believe that you will owe your dues to Uncle Sam. However, it is important to plan for this, and to ensure that you will never end up paying more than needed in your taxes. There are a variety of strategies that we can implement in this plan from withdrawal strategies to Roth conversion strategies.
4. Healthcare Plan
This is the less glamorous, but unfortunately common, side of retirement. Healthcare costs tend to rise pretty consistently upon retirement, and therefore, a healthcare plan is an essential aspect of an overall retirement plan. There are a variety of factors that will impact your healthcare plan. One of the main factors people face is medicare planning in addition to any supplemental and long-term planning.
5. Legacy/Charitable Plan
This is the part of the plan that most people prefer not to think about, however, it is a part that requires thorough consideration. When a person passes away, their money and assets will have to go somewhere. It could end up at any of these three places: to their heirs, to a charity, or to the government. It is important to put consideration into where you would like for your own assets to go, and to set up a plan to ensure that your wishes are granted when that time comes. In addition to estate planning, is the wealth transfer plan. This plan simply alerts those who will be receiving assets upon your death so that they can be prepared to receive it when the day comes.
There are a variety of essential parts to a retirement plan, and at times this can seem overwhelming. If you are looking to increase security upon retirement, our team of experienced financial advisers is happy to help you develop a plan that best fits your unique needs, income, and interests. Contact Streamline Financial Services today, to meet our team and learn more about our unique approach to each of these essential mini plans.
We just found out that Social Security benefits are going up 1.3% in 2021. In this post, I want to talk about three things:
1) What does this mean for people receiving Social Security in 2021? Is it really 1.3%?
2) If I’m planning for retirement, what Social Security increases should I assume every year?
3) We’re going to look at a case study, an example, of using historical averages for what Social Security will go up in our retirement simulations.
Whether you’re retired or you’re 10 years out from retirement, Social Security is one of your biggest assets. So keeping up to date with how it works is really important to your financial plan.
According to the Social Security Fact Sheet on ssa.gov, Social Security income beneficiaries will receive a 1.3% COLA – not a soft drink, but a cost-of-living adjustment – in 2021. So, it’s a pay raise.
The average person receives about $1,500 a month in Social Security benefits. A 1.3% increase means about a $20-a-month increase. So, that’s good; now I can upgrade my Netflix subscription from Premium to Ultra. But here’s the thing: when Social Security goes up, and we’ve seen this time and time again in helping families plan for retirement, your Medicare premium goes up as well.
Now, we don’t know how much Medicare’s going to go up next year. For Medicare Part B, back in April, the Medicare trustee report said they think benefits are going to go up by $8 a month per person. So you hit that $8 and all of a sudden that’s taking away from your 1.3% COLA. I would say the net effect of Medicare and Social Security together is actually only a 0.8% increase.
Why is this important?
If you’re planning ahead and you’re running retirement scenarios, which you should do, it’s important to know what growth rate to assume for Social Security in the future. So, my first thought was to take a look at history because we can use history as a guide, though not a guarantee, as far as what Social Security will do in the future.
I looked all over the internet for a historical average of Social Security COLAs and I couldn’t find one, so I made one. And since 1975, when the cost of living adjustment law came into effect, we’ve been keeping track of those averages. That average comes out to 3.6%.
You could be a little conservative and estimate Social Security will go up 3% a year. Well, this year has historically low interest rates and we have a historically low Social Security COLA.
Should we use 3%, even though that’s a conservative number moving forward? I’m going to show you a case study that says, I’m not sure if we should.
I’ve got this family here: Stan and Joanna. They’re about 10 years out from their retirement age of 65, they have three kids, and their net worth is right around $2 million. Right now they make $350,000 of combined-growth income, and they’re projected to receive about $50,000 a year in Social Security when they retire.
Let’s look at Stan first, and assume his benefit is going to grow 3% per year until retirement. Currently, they have about $10,000 in monthly expenses plus their mortgage, which is pretty big. And then in retirement, they think they’ll have about $100,000 a year in expenses.
In looking at their long-term financial plan, all of these expenses and income and investments are being factored into the picture which you can see in the video. And the picture looks good based on a 3% cost-of-living adjustment on their Social Security.
You can even run a test and determine what is the percentage chance that you’ll need to make an adjustment during the next 30 or 40 years into retirement? And based on this scenario, the chance of needing to make an adjustment is only 3% because it’s a 97% success rate.
However, what happens if we change this to Social Security with no COLA, which is 0% (because this year it’s really close to zero). When running scenarios, should we use historical averages? Or should we go with Medicare and Social Security moving in tandem with one another – as the benefit from one goes up, the cost from the other goes up – so this might be the safer way to go. In this case, the long-term plan goes from a 97% success rate down to 74%.
In this scenario, there’s a 1 in 4 chance I’ll need to make a big adjustment between now and retirement, or maybe even in retirement, meaning:
I need to work longer, or
lower my expenses in retirement, or
save more now.
These are all doable things, but this shows you that the change in value of their net worth over time was 2.7 million upon assuming 0% versus 3%.
So, again, if you’re planning for retirement, knowing what Social Security’s impact is on your situation is huge for a lot of Americans.
If you have any questions on this, feel free to reach out to us. Or talk to your financial planner and ask how they are assuming Social Security is going to grow over the next 20 or 30 years and maybe assume zero, just to be safe.