America is facing a crisis, as the baby boomer generation heads into retirement and realizes — too late — it may not have set aside enough assets.
Most Americans have an average savings of only $3,000 to $10,000, and the Social Security Administration says 34 percent of the workforce has no retirement savings.
A reasonable rule of thumb is to save 25 times the amount you need annually to take from your investments in order to cover your expenses, says Norman M. Boone, founder and president of Mosaic Financial Partners Inc. Another way to think about it, is can you sustainably withdraw about 4 percent of your investments and have it last you for 30 years or so.
“Retirement is about having choices, and being able to do the things that you want to do,” he says. “If you’ve got to go and be a Wal-Mart greeter for six days a week for the rest of your life that may not be how you want to be spending your time.”
So, as people live longer and longer, how can you ensure your money lasts through retirement? It’s all about the planning.
Smart Business spoke with Boone about it’s better to plan for retirement now.
What’s the first step to structuring your retirement savings plan?
Look at everything you own and owe. Compile an accurate personal balance sheet by writing down the value of your investments, home(s), retirement accounts, debts, mortgages, loans, etc. All of these things impact your flexibility, and how confident you can be looking into the future.
Take control over the things you have some choice about: a) spending less (and saving more) while you’re working; b) spending less in retirement; c) investing more aggressively; or d) working longer.
How can you project how much you’re going to spend in retirement?
This is usually related to your current lifestyle. Understand how much you spend now and make adjustments for likely changes, such as how much your kids are costing, contributions to a 401(k) plan you won’t be making and when you’ll pay off the mortgage. According to a J.P. Morgan Chase study, retirement spending has three phases:
- Go-Go: For the first 10 or 15 years, you’ll likely spend what you did in the last few years of working life. You may travel more or spend more on hobbies, but other expenses will decrease.
- Go-Slow: In this period, expenses fall 20 to 30 percent over time as you slow down.
- No-Go: At this point, your spending will probably decline further, but if you have medical/health issues, expenses could rise dramatically. It’s tough to predict.
Getting a handle on potential expenses, adjusted for some reasonable amount of inflation, is important. Since you must start somewhere, all you can do is take your best guess. The projections are almost certain to be wrong — but hopefully you’ll get close.
What’s the next step to planning?
Once you’ve projected your expenses, estimate your likely sources of retirement income. How much will you be getting from Social Security? Do you have a rental property or pension plan? Will you work, and for how long? What other sources of non-investment income are likely?
Then, compare your expected income to expected expenses. The shortfall needs to be covered by withdrawals from your investment portfolio, including retirement and taxable accounts. As an illustration, if your likely income were $10,000 short of projected expenses, you’d need about $250,000 (25 x $10,000) of investment assets to pay for withdrawals over 30 to 35 years.
Based on this, how would you recommend people set up their investment strategy?
Most of us hopefully have some investments set aside, so the real question is: How can I invest this wisely, and what returns do I need so my investments don’t run out?
Financial planners can assist by helping you look at various scenarios. A Monte Carlo simulation, for example, often literally tests 10,000 possibilities to offer a sense of what’s most likely to occur in the future. Once you’ve identified the needed investment return in your desired scenario, work backwards. The return required will suggest investment allocations — how much to put in stocks, bonds, etc. That way, you’re not just guessing at the ‘right allocation,’ hoping it comes out OK. It’s a more thoughtful, deliberate approach to retirement planning that can help you reach your goals. ●
Norman M. Boone is founder and president at Mosaic Financial Partners Inc. Reach him at (415) 788-1952 or [email protected].
Insights Wealth Management & Finance is brought to you by Mosaic Financial Partners Inc.
