During the month of May, Vermillion Financial Advisors work with their clients to review their retirement goals and work to make sure their retirement plans are on track. We would like to provide you, our readers, with an article to supplement your retirement planning process!
Americans are living longer than ever before, with an average lifespan that, according to U.S. government figures, has increased from 73.7 years in 1980 to 78.3 in 2010 and a projected 79.5 by 2020. While that means more time to enjoy life, it also presents a dilemma: How are we going to make sure our money lasts a lifetime so we can keep living the lifestyle in which we’re accustomed, whether we live until 70, 80, 90 or more?
It’s a question that requires pondering, whether your retirement is already upon you, looming in the not-too-distant future or still decades away. Essentially, said June Schroeder, CFP®, it comes down to basic math: How much will you have saved come retirement, and how long will that nest egg last, based on how much you spend, what your income is, and how long you expect to live? “Then you’ll see if your portfolio will provide you enough income for life.”
Sounds straightforward enough, right? Not exactly. Embedded in that seemingly simple equation are a lot of unknowns, from the performance of your investments to your health and more. Still, there are simple steps to take now to address those uncertainties and give yourself the best chance of not outliving your nest egg:
- Find a financial ally. Considering the many complexities that go into developing a complete picture of a person’s finances and their income needs during retirement, and the fact that some key assumptions in the retirement income model have changed recently, it makes sense to consult a CERTIFIED FINANCIAL PLANNER™ professional to help crunch the numbers and develop an accurate, actionable plan for building a nest egg to last throughout retirement.
- Manage your cash flow. Cash flow is the foundation for determining a person’s retirement income needs. That means developing a solid, detailed picture of what you’re taking in, what you’re spending, and what your expenses are. Before retirement, this picture will reveal how much you can afford to put toward your retirement nest egg. During retirement, it will reveal how long your money will last. Here’s another area where the input of a financial planner is invaluable.
One way to stretch your retirement dollars is to cut back on spending. The less you spend during retirement, the slower you’ll drain the nest egg. And prior to retirement, the less you spend, the more you can put away for later, notes Schroeder. A financial planner can help identify places to cut spending. - Protect your asset base. Given the time, effort and commitment it takes to build a solid nest egg using a 401(k), IRA, pension and other assets you’ll be relying upon to yield retirement income, Schroeder recommends taking steps to protect those assets from the risk of a market downturn (what if, with retirement just around the corner, a stock market nosedive takes a major bite out of your nest egg?) as well as other risks such as higher inflation and an unexpected health crisis. Taking a safer approach to one’s investment portfolio as retirement nears makes sense, said Schroeder, and in some cases, so does investing in inflation-protected securities — investment instruments that include features designed to protect investment value if inflation increases. Meanwhile, investing in long-term care insurance protects a nest egg from the risk of a potentially draining health care crisis.
- With retirement looming or already here, consider income-producing investments such as dividend-paying stocks.
- Assess your tax situation. Having a tax strategy is key to stretching retirement income, said Schroeder. When to start taking Social Security income? How to handle requirement minimum distributions from retirement account? These are just a couple of the many issues to consider in maximizing your tax efficiency. The potential complexity of these issues makes it a good idea to consult a tax expert.
- Kick the tires on a guaranteed-income vehicle. Annuities are insurance contracts, some of which include features that provide contract-holders with a guaranteed income stream for life, or for a certain period of time during retirement. Fees, market risk and moving parts often accompany these annuity products, so consult a financial planner before investing in one.
- Live healthy! The healthier you are, the less you’ll spend on health care. Depending on your age, you can use those savings to stretch or strengthen a retirement nest egg.
This column is provided through the Financial Planning Association, the membership organization for the financial planning community.
Note: The opinions voiced in this material are for general information only and not intended to provide specific advice or recommendation for any individual. Please remember that past performance of investments may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this newsletter (article), will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio. Due to various factors, including changing market conditions, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this post serves as the receipt of, or as a substitute for, personalized investment advice from Vermillion Financial Advisors, Inc. To the extent that a reader has any questions regarding the applicability of any specific issue discussed within this newsletter to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. A copy of our current written disclosure statement discussing our advisory services and fees is available for review upon request.
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