The recent market volatility at the end of 2018 reminded us that markets don’t always behave as we would like. We’re sure that many people probably fell out of their chair after they opened up their Dec. 31 account statements. Even though volatility is normal and expected when investing, for people nearing retirement and in retirement, such market swings can be especially worrying. We felt it would be a good time to review ways to lessen the possibility of running out of money in retirement.
Step 1: Put a Plan in Place … Well Before Your Expected Retirement — There have been numerous studies that show that when people expect to retire and when they actually retire are often very different. You may expect to work longer than you actually do which could be caused by a variety of factors such as a company restructuring or you encounter a health issue that forces you into an earlier than expected retirement. This is why it’s important to begin working on a retirement plan well before you actually retire. This will give you time to understand what you are doing correctly as well as ways you may be able to improve.
Step 2: Maximize Your Retirement Savings — This may sound obvious, but we can’t emphasize it enough. The Government Accountability Office released a study in October 2017 that found the median retirement savings for Americans age 55-64 was approximately $107,000. This is similar to a study done by the Employee Benefit Research Institute in 2013 that found that 60 percent of workers age 55 and older had an average of $100,000 or less in retirement savings. Saving is tough and involves balancing current needs with future needs. It’s important to understand what retirement plans may be available to you through your employer and whether your employer offers a match. In 2019, the amount that employees can contribute to eligible workplace plans such as a 401(k) is $19,000 for those under age 50 or $25,000 for those over 50. If your employer doesn’t offer a retirement plan, don’t forget about IRAs. In 2019, the annual amount that you can contribute to an IRA is $6,000 for those under age 50 and $7,000 for those over age 50.
Step 3: Understand Your Sources of Income in Retirement — As part of your retirement plan, you should have a good understanding of the sources of income you expect to receive in retirement. This can include sources such as Social Security, pensions, or income from part-time work. This will help you estimate how much of your living expenses will be covered by income sources and how much you may have to withdraw from your portfolio to cover any shortfalls.
Step 4: Understand Major Retirement Expenses — An accurate and realistic budget is a cornerstone of a well thought out retirement plan. However, two expenses that are often overlooked and/or underestimated are health care costs in retirement as well as a potential long term care need. Every year Fidelity Investments releases a study that estimates the cost of health care in retirement for a married couple age 65. In 2018, Fidelity found that an average couple age 65 may need approximately $280,000 (after tax) in today’s dollars to cover health care expenses in retirement. This number doesn’t even include a potential need for long term care in the future! A qualified professional can help you understand what you might expect to pay in health insurance premiums and expenses in retirement as well as options to insure for long term care needs.
Step 5: Review Your Portfolio — You should review your portfolio occasionally and make sure that it is still aligning with your overall goals and risk tolerance. Remember that volatility is to be expected as part of investing in the market and you shouldn’t make emotional decisions based on short term market movements. However, an overall assessment of your portfolio can help identify areas where you can make some adjustments. Also, if you are looking to create an income stream in retirement, don’t completely discount annuities. Annuities can be complex, but their main purpose is to help protect against longevity risk (i.e. outliving your assets).
Although following the above steps cannot guarantee you will have adequate assets to last a lifetime during retirement, following them will give you a solid plan and map out what is realistically needed to maximize the resources that you do have. There is no question about it, starting as early as possible with a disciplined accumulation plan gives you a big head start.
Gary E. Croxall, CFP®
Registered Principal of LPL
Soren E. Croxall, CFP®
Registered Representative of LPL
Securities and Advisory Services offered through LPL Financial, a Registered Investment Advisor. Member FINRA & SIPC. LPL Financial and Croxall Capital Planning do not provide tax or legal advice. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
