We often talk to our younger clients about Goals Based Investing, which involves distinguishing “must haves” from “want to haves.” In the same way, retirees can engage in Goals Based Budgeting to understand how much cash flow they’ll need to sustain their version of a meaningful retirement. Of course “must haves” include basic needs like food, shelter, and health care. But for most retirees, they also include a lifestyle that’s similar to the one they’ve lived prior to retirement. Identifying “want to haves” involves making personal decisions about the extras that are most important to you, and there are no wrong answers.
To establish your budget, you’ll need to estimate how many years you’ll need to fund during retirement, and that can be difficult. The Society of Actuaries reports that 43% of retirees underestimate their life expectancy by at least five years. As longevity continues to increase, more and more people are considering working in retirement as a way to offset costs. Another challenge retirees are currently facing is that low interest rates have driven down income from the safer assets they prefer, so a recalibration may be necessary. Your financial advisor can review your asset allocation and help identify a budget that’s appropriate for you.
When it comes to spending, one commonly used formula is known as the 4% rule, which basically involves withdrawing 4% of your retirement savings every year, while adjusting for inflation. It’s a decent starting point, but it assumes historical market returns, which may differ now due to the aforementioned low interest rates, and a portfolio that is 50% stocks and 50% bonds, which may not be appropriate for your particular situation. In addition, longevity needs to be considered, which varies from retiree to retiree.
All in all, if you craft the right withdrawal and spending program for your circumstances, monitor it continually, and stay flexible enough to reduce spending in bad years if needed, you should have a plan that stands the test of time.
Registration with the SEC should not be construed as an endorsement or an indicator of investment skill, acumen, or experience. Investments in securities are not insured, protected, or guaranteed and may result in loss of income and/or principal. Nothing in this communication is intended to be or should be construed as individualized investment advice. All content is of a general nature and solely for educational, informational, and illustrative purposes.
Reference: Life expectancy underestimation – https://www.cnbc.com/2018/01/12/failing-to-plan-for-longevity-can-hurt-your-finances.html