David Lerner Associates: A Retirement Income Roadmap For Women
More women are working and organizing their own retirement planning than ever before. What does retirement mean to you? Do you dream of traveling? Going after a hobby? Volunteering your time, or starting a new career or business? Simply enjoying more time with your grandchildren? No matter what your goal, you'll need a retirement income plan that's created to support the retirement lifestyle that you envision, and minimize the risk that you'll outlive your savings.
When will you retire?
Developing a target age is essential, because when you retire will significantly affect how much you need to save. For instance, if you retire early at age 55 as opposed to waiting until age 67, you'll shorten the time you have to accumulate funds by 12 years, and you'll increase the amount of years that you'll be living off of your retirement savings. Also consider:
- The longer you delay retirement, the longer you can accumulate tax-deferred funds in your IRAs and employer-sponsored plans like 401(k)s, or accrue benefits in a traditional pension plan if you're lucky enough to be covered by one.
- Medicare generally doesn't start until you're 65. Does your employer provide post-retirement medical benefits? Are you qualified for the coverage if you retire early? Do you have health insurance coverage through your spouse's employer? Otherwise, you may have to check out COBRA or a private individual policy-- which could be expensive.
- You can begin receiving your Social Security retirement benefit as early as age 62. Having said that, your benefit may be 25 % to 30 % below if you waited until full retirement age. Conversely, if you delay retirement past full retirement age, you may have the ability to increase your Social Security retirement benefit.
- If you work part-time during retirement, you'll be earning money and depending less on your retirement savings, leaving more of your savings to possibly grow for the future (and you may also have accessibility to affordable health care).
- If you're married, and you and your spouse are both employed and close to retirement age, consider staggering your retirements. If one spouse is making significantly greater than the other, then it usually makes sense for that spouse to continuously work in order to maximize current income and ease the financial transition into retirement.
How long will retirement last?
We all wish to live to an old age, but a longer life means that you'll have much more years of retirement to fund. The problem is especially acute for women, who typically live longer than men. To defend against the risk of outliving your savings, you'll have to estimate your life expectancy. You can use government statistics, life insurance tables, or life expectancy calculators to get a reasonable estimate of how long you'll live. Experts base these estimates on your age, gender, nationality, health, lifestyle, occupation, and family history. But remember, these are just estimates. There's no way to predict how long you'll actually live, but with life expectancies on the rise, it's probably best to assume you'll live longer than you expect.
Project your retirement expenses
Once you know when your retirement will likely start, how long it might last, and the kind of retirement lifestyle you want, it's time to estimate the amount of money you'll need to make it all happen. One of the biggest retirement planning mistakes you can make is to underestimate the amount you'll need to save by the time you retire. It's often repeated that you'll need 70 % to 80 % of your pre-retirement income after you retire. However, the problem with this approach is that it doesn't account for your specific situation.
Focus on your actual expenses today and think about whether they'll stay the same, increase, decrease, or even disappear by the time you retire. While some expenses may disappear, like a mortgage or costs for commuting to and from work, other expenses, such as health care and insurance, may increase as you age. If travel or hobby activities are going to be part of your retirement, be sure to factor in these costs as well. And don't forget to take into account the potential impact of inflation and taxes.
Identify your sources of income
Once you have an idea of your retirement income needs, your next step is to assess how prepared you (or you and your spouse) are to meet those needs. In other words, what sources of retirement income will be available to you? Your employer may offer a traditional pension that will pay you monthly benefits. In addition, you can likely count on Social Security to provide a portion of your retirement income. Other sources of retirement income may include a 401(k) or other retirement plan, IRAs, annuities, and other investments. The amount of income you receive from those sources will depend upon the amount you invest, the rate of investment return, and other factors. Finally, if you plan to work during retirement, your earnings will be another source of income.
When you compare your projected expenses to your anticipated sources of retirement income, you may find that you won't have enough income to meet your needs and goals. Closing this difference, or "gap," is an important part of your retirement income plan. In general, if you face a shortfall, you'll have five options: save more now, delay retirement or work during retirement, try to increase the earnings on your retirement assets, find new sources of retirement income, or plan to spend less during retirement.
Transitioning into retirement
Even after that special day comes, you'll still have work to do. You'll need to carefully manage your assets so that your retirement savings will last as long as you need them to.
- Review your portfolio regularly. Traditional wisdom holds that retirees should value the safety of their principal above all else. For this reason, some people shift their investment portfolio to fixed income investments, such as bonds and money market accounts, as they enter retirement. The problem with this approach is that you'll effectively lose purchasing power if the return on your investments doesn't keep up with inflation. While it typically makes sense for your portfolio to become considerably more conservative as you grow older, it may be wise to consider maintaining at least a portion in growth investments.
- Spend wisely. You must be careful not to spend too much too soon. This can be a great temptation, especially early in retirement. A good guideline is to ensure your annual withdrawal rate isn't greater than 4 % to 6 % of your portfolio. (The appropriate percentage for you will depend on a number of factors, including the length of your payout period and your portfolio's asset allocation.) Remember that if you whittle away your principal too quickly, you may not be able to earn enough on the remaining principal to carry you through the later years.
- Understand your retirement plan distribution options. Most pension plans pay benefits in the form of an annuity. If you're married, you generally must choose between a higher retirement benefit that ends when your spouse dies, and a smaller benefit that continues in whole or in part to the surviving spouse. A financial professional can help you with this difficult, but important, decision.
- Consider which assets to use first. For many retirees, the answer is simple in theory: withdraw money from taxable accounts first, then tax-deferred accounts, and lastly, tax-free accounts. By using your tax-favored accounts last and avoiding taxes as long as possible, you'll keep more of your retirement dollars helping you. However, this approach isn't right for everyone. And don't forget to plan for required distributions. You must generally begin taking minimum distributions from employer retirement plans and traditional IRAs when you reach age 70 1/2, whether you need them or not. Plan to spend these dollars first in retirement.
- Consider purchasing an immediate annuity. Annuities have the ability to offer something unique-- a guaranteed income stream for the rest of your life or for the combined lives of you and your spouse (although that guarantee is subject to the claims-paying ability and financial strength of the issuer). The obvious benefit in the circumstance of retirement income planning is that you can use an annuity to lock in a predictable annual income stream, exempt to investment risk that you can't outlive.
- Unfortunately, there's no one-size-fits-all when it comes to retirement income planning. A financial professional can review your circumstances, help you sort through your options, and help develop a plan that's right for you.
Material contained in this article is provided for information purposes only and is not intended to be used in connection with the evaluation of any investments offered by David Lerner Associates, Inc. This material does not constitute an offer or recommendation to buy or sell securities and should not be considered in connection with the purchase or sale of securities.
David Lerner Associates does not provide tax or legal advice. The information presented here is not specific to any individual's personal circumstances.
To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.
These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable-- we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.
Some of this material has been provided by Broadridge Investor Communications Solutions, Inc.
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Founded in 1976, David Lerner Associates is a privately-held broker/dealer with headquarters in Syosset, New York and branch offices in Westport, CT; Boca Raton, FL; Teaneck and Princeton, NJ; and White Plains, NY. For more information contact David Lerner Associates Call 516-921-4200 Visit our website: http://www.davidlerner.com