With many people living 10, 20 or even 30 years after retirement, planning for your financial future has become more important than ever.
While many people plan through the time up until their retirement, too many fail to consider the decades that could come after. If you live another 30 years after you retire, have you put yourself in a financial position so that your body doesn’t outlive your money?
“You really need to determine where your money is going and what might change,” says Carina Diamond, CFP®, the managing director of SS&G Wealth Management LLC. “If you can get your expenses lower now, then you can live a very rich retirement on less income.”
Smart Business spoke with Diamond about how to make sure that you don’t outlive your money.
How do you start planning for your financial future after retirement?
You first have to identify how much you are spending now and where that money is going. Any future planning must start with your current expenses, because what you’re trying to replace is the income that is paying those expenses. You need to determine what those expenses are, what can be eliminated and what will change going forward.
People tend to underestimate how much they are actually spending. Once you’ve determined that, you need to work backward from that to determine how much money you will need in retirement.
The next step is to define your goals. Some people may not know what those are, and that’s OK, but the point is to try to quantify as much as you can. For example, choose a few different ages at which you think you might want to retire, say 60, 65 and 70, then work backward from that and talk about the lifestyle you’d like to have. People used to think that expenses went way down in retirement, but in fact, expenses tend to stay the same or increase as people travel or do other things they didn’t previously have time for. When people are no longer in the office all day, they have more time to spend money.
How much does someone typically need in retirement?
People used to say you needed $1 million, or half-a-million, but there is no magic number. Instead, you need an income stream that you can’t outlive. It’s all about the income that your investments can generate that is going to determine your lifestyle.
There are a number of things you can do to plan for an income stream that is there when you need it, and it starts with projections of what you need to spend. Once you have that, you need to evaluate your investments with your adviser to make reasonable projections of what those are likely to grow to. You also need to look at income from a number of different sources, such as dividend-paying stocks, rental property, any ongoing consulting you might be doing and annuity investments.
Once you’ve done that, the next thing to consider is your withdrawal rate. The financial planning industry recommends that you don’t withdraw more than 4 to 5 percent a year. If you stick to that guideline, then statistically, there is a good chance that you will not run out of money. But if you start to take out more — and some people will have to — the odds increase that you will run out of money before the end of your lifetime. So if you have a million dollars, you should only be withdrawing 40,000 to 50,000 a year.
If you’re in your 60s and married, according to actuarial tables, there is a really good chance that one or both of you will live into your 90s. Thirty years is a long time frame, and to make your money work for you, you need stocks. People worry about the volatility of the stock market, but if you don’t do anything to grow your money, you are incurring the very real risk of inflation. If you’re not investing for growth, you may think you’re being conservative, but you’re taking a real risk of losing purchasing power.
How important is diversification of assets?
Every person is different in terms of their investment portfolio, depending on age, tax situation, preference and other factors, so there’s no one thing that everyone should be invested in. The biggest thing is to diversify between asset classes in investments that don’t all perform the same way in different economic scenarios. You don’t want them all to do badly if the economy is weak and you don’t want to have all your money in investments that are interest-rate sensitive. A professional investment adviser can help you make the best decisions for your situation.
How does health factor into the equation?
Health is one of the biggest wild cards. You can do all the planning in the world, and have the best investment manager in the world, but if you get sick and need long-term care later in life and you don’t have coverage for that, that can be devastating. It can ruin your whole financial plan, so you also want to do long-term care planning; consider buying long-term care insurance if you can qualify for in-house health care and a nursing home. It’s the No. 1 thing that people forget about, or just don’t plan for. But it is a major wild card that can really disrupt an otherwise sound plan.
It is generally recommended that you start considering it in your early 50s, but it’s getting harder to get and getting more expensive, so you may want to consider buying it earlier.
