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Retirement Planning

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Q: How will I know whether I have enough money to retire?

A:  Some people obviously have more money than they will ever spend, but most retirees are not in that situation and, therefore, need a plan. Some people use spreadsheets, which can give a false sense of security because they assume a consistent return on investments each year. There are too many variables, such as one-time inflows/outflows, inflation, and the variability of investment returns. The best projections are created using financial planning software that can run hundreds or thousands of scenarios, using randomized investment returns. This type of planning will give you a range of outcomes, the median (most likely) outcome, and the probability of success (i.e., not running out of money).

For more details on this topic, read: Retirement Planning: Frequently asked Questions.

Q: Do people underestimate how much they will spend in retirement?

A: Not necessarily.  In fact, it is easy for a financial plan to overestimate spending.  A growing body of research shows that the average retiree buys slightly fewer goods and services each year throughout retirement. Therefore, a worker could overestimate the amount needed to retire if he or she assumed that all spending was going to grow at 3% per year for 20-30 years. Read: Retirement Spending – Are You Overestimating.

Q: How can I retire earlier?

A: Early retirement is considered any time before you reach your Social Security full retirement age (currently 66-67 depending on your birth year). You need to save 10-15% of your income to retire by age 66 at a similar lifestyle to what you enjoyed while working. This assumes that you will not have a pension, inheritance, or any plans to downsize your residence. You will likely need at least a 25-30% savings rate throughout your career to retire by your mid-50s. For early retirement tips and more on this topic, read: Early Retirement- Is It Possible For You?.

Q: How do I start planning for retirement?

A: The first step in planning for retirement is to determine how much you would like to spend each month or year as well as a list of one-time expenses (car purchases, home remodeling). The next step is to make a list of your retirement income sources (e.g., Social Security, pensions, annuities, etc.) The third step is to make a list of assets and liabilities. A good financial planner can enter this information into financial planning software and test thousands of possible scenarios to help create a retirement plan. This can help you evaluate changing your investment strategies and other financial decisions that can increase your probability of success (i.e., not running out of money). Read: Retirement Planning – Frequently Asked Questions.

Q: How much money do I need to save for retirement?

A:  Most financial advisors and personal finance books recommend saving 10-15% of your income for retirement. Naturally, the actual amount that you need to save will depend on on a variety of factors such as whether you will have a pension, whether your home will be paid off prior to retirement, your retirement age, and the rate of return on your investments.  The suggested 10-15% is well above the national average of 5%, (which includes contributions to retirement plans such as 401ks). Read: Saving 15% of Your Income For Retirement.

Q: How much should I budget for medical costs in retirement?

A: We recommend budgeting $5,000 – $7,000 per person per year beginning at age 65. The average 65-year-old couple will spend an average of $260,000 on healthcare over the course of their retirement. If you were to include the couple’s total healthcare (dental, vision, deductibles and co-pays, prescription drug coverage, and all out-of-pocket expenses), their costs would rise to an average of $394,954 over the duration of their retirement. For a 55-year-old couple retiring in 10 years, total lifetime healthcare costs would rise to $463,849. Read: Healthcare Costs – Budgeting For Them In Retirement.

Q: Should I take the lump sum pension option or lifetime monthly payments?

A: There are pros and cons to both options. This needs to be analyzed on a case-by-case basis, including such variables as recipient’s health, the family’s financial needs, and other assets and income streams. Monthly payments will provide you with the most financial security, but then there will be no death benefit to pass on to your heirs. A lump sum can be rolled over into an IRA, invested however you see fit, and enables you to control the timing and amount of distributions. Read: Pension Decision – Lump Sum or Lifetime Payments?

Q: What are the best places to retire in the United States?

A: The four cities that gained the most retirees who relocated across state lines between 2005-2010 were Phoenix, Tampa, Atlanta, and Las Vegas. When considering relocating for retirement, it is important to consider factors such as housing and other costs of living, taxes, crime rates, weather and air quality, doctor availability, and opportunities for an active lifestyle, including walking, bicycling, and volunteering. To read more about the best places to retire, see:  Retirement Relocation – Key Insights.

Q: What is the average retirement age?

A: The average retirement age nationwide is 63 (as of 2017). The average age varies by state and ranges from 62-65. Workers on average retire 2-3 years sooner than planned, due to layoffs, health problems, or the need to take care of family members. That being said, the actual retirement age has been increasing since 2004. Read: Actual Retirement Age VS. Planned Retirement Age.

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