Notes on Retirement Planning
Published On: March 25, 2019
Written by: Ben Atwater and Matt Malick
Some of us don’t know when or if we want to retire. Others have an age goal, while some wanted to retire yesterday. Based on our experience working with a wide variety of clients with differing retirement needs, we thought we’d share with you some of what we have seen most recently.
Although saving and investing are incredibly important, as you approach retirement, it’s vital to take a closer look at spending. For most people, our last decade of work will require peak savings and a sharp eye on current and future (retirement) expenses.
The U.S. Bureau of Labor Statistics estimates the average household spends most of its income (65%) in four areas – housing (28%), transportation (14%), food (13%) and health care (10%). For more affluent households these percentages tend to drop as more money is spent in luxury areas like travel, collectibles, fashion, etc.
If you’re interested in delving into your expenses more thoroughly, please let us know. We have the tools and experience to help you flag spending issues.
Fidelity Investments estimates that a couple will spend about $280,000 on healthcare throughout their retirement. This does not include long-term care costs. This also assumes the couple will wait until 65, when they are eligible for Medicare, to retire. Obviously, this is a daunting sum, and might be a best-case scenario, especially if you live into your 90s. Our retirement planning specifically accounts for these expenses.
Simply said, waiting until 65 (Medicare) to retire is a necessity for many. However, with a properly structured income some affluent clients may still qualify for meaningful Obamacare subsidies. If you’re approaching age 65, we have resources to help you find the right Medicare coverage.
We focus a lot of attention on building portfolios that can provide clients with retirement income. These planned systematic withdrawals from retirement funds supply clients with a consistent “pay check” to replace their working income. In a low interest rate world, we look to total return investing – generating payouts from dividends, interest and long-termappreciation.
Generally speaking, a sustainable spending rate from retirement funds is approximately 3% to 5% of your corpus, depending on your timeframe and whether your goals include leaving a legacy to heirs.
Furthermore, even for mass affluent investors, Social Security plays an important role in retirement income planning. Please don’t make any Social Security decisions without performing an analysis of your best options.
Investors tend to underestimate their time horizons. In today’s world, retiring at 65 can mean you have a 30-year retirement ahead of you. Under such circumstances, you will need to take risk in order to generate enough return to keep pace with inflation and retirement payouts.
Using historical inflation rates, the equivalent of $1 of purchasing power today will cost you $2.43 in 30 years. You would need $2.43 million to equate to a $1 million portfolio today. Investing is an absolute necessity. Investors need to model how much risk they must take to meet their return goals. That’s the easy part.
The hard part is then sticking to the discipline through thick and thin. Getting scared out of the market at the wrong time is a recipe for failure. Behavioral coaching around risk tolerance, volatility and goals is probably the most important job of an investment advisor.
As our practice continues to evolve based on client needs, we are spending increasing amounts of time and resources on client retirement planning. We couple this with a highly disciplined investment approach, which together should help clients achieve their retirement goals.