For many investors, retirement seems far away… until it doesn’t.
With even financially savvy people focused on present concerns such as their careers and paying for their children’s college educations, retirement considerations are put off until they can no longer be ignored. However, retirement planning needs to be a key part of any comprehensive wealth management strategy.
Ideally, you should be considering your retirement from very early in your career. But, if you’ve been delaying retirement planning, you need to start now. Discover three questions you should ask yourself and discuss with your financial advisor to plan for your dream retirement.
1. What Is Your Planned Withdrawal Rate?
Your dream retirement isn’t the same as everyone else’s. Your approach to retirement planning shouldn’t be either.
Sure, you could plan for a standard 4% withdrawal rate, wherein you withdraw 4% of your portfolio the first year of your retirement and then increase that amount by the rate of inflation each year. But, depending on how you want to live and what you want to do with your retirement, that might not be the right approach for you. You may end up with not enough money early in your retirement and too much left over at the end of your life.
For instance, let’s say you plan to spend the first years of your retirement sailing around the world on a yacht. Then, after a few years on the sea, you’ll sell the yacht and purchase a small cottage in Maine to live out the rest of your life modestly. In that instance, a 4% withdrawal rate plan likely won’t work. You won’t have enough funds to purchase your yacht or support the costs of your travel. Then, later on, you’ll have an excess of funds when you’re living more quietly.
Alternatively, if you plan on scaling back and living quietly for your whole retirement but want to transfer as much of your wealth as possible to your heirs, you may also want to find a different approach. You’ll want to plan for a withdrawal rate that preserves most of your money until the time comes to transfer your assets to your loved ones.
2. What Is Your Retirement Savings Rate?
Similarly, your approach to retirement savings should also be tailored to your specific goals. A good place to start when determining your ideal retirement savings rate is to look at your retirement goals and work backward.
Even if you plan to live modestly during your retirement, it’s important to understand that you will likely need nearly as much per year as your current income. Many people underestimate how much they’ll need to save for retirement. Also, with average lifespans increasing every year, you need to plan to live longer than you might have anticipated.
At the very least, if your employer offers matching contributions to an employee retirement plan such as a 401(k), you should contribute as much as necessary to get the maximum matching rate. Otherwise, you’re just leaving money on the table.
Additionally, you should consider adding an auto-escalation option to your retirement savings plan. These options automatically increase the percentage of your income you contribute to the plan each year. Over time, this auto-escalation should help you get your retirement savings rate up to 15%, which may be ideal.
3. At What Age Do You Plan To Retire?
When planning for retirement, you also need to factor in the age at which you will retire. Many investors dream of retiring early. While this may be attainable for some people, this choice impacts your retirement income.
For instance, if you plan to cash in your 401(k) savings before you turn 59½ years old, you will have to pay a substantial penalty. Also, if you plan on taking Social Security at the earliest possible date, you need to understand that you’re sacrificing 8% per year for every year up to age 70. That can add up to nearly one-third less in your total Social Security payments than you would have received if you’d waited.
You also may look at your current assets and decide that you should have enough to retire. However, you need to consider your own particular spending pattern. While $3 million may appear to be enough to sustain you for the rest of your life, if you currently spend $80,000 per year on family vacations and plan to continue, you may need to reevaluate that choice.
The three questions above form a solid basis for serious retirement planning. Consider them when working with your wealth management advisor to build a retirement planning strategy that works for you.
Are you ready to leave one-size-fits-all money management behind? Schedule a free consultation with a Richard Brothers financial professional to talk about your financial future.
