Towards the end of a financial review meeting with a young couple, I asked if they had any other questions.
Making a joke, the husband asked, “Can we retire?!?
They were a little caught off guard when I answered with, “Yes.”
They earn a good living, have a small child and have built a modest net-worth of $370,000. I was being glib, but I wanted to use the question as a platform to preview retirement distribution planning.
I explained, “You can retire if not-working is the goal that governs every other decision you wish to make for the rest of your life.”
Playing along the wife asked, “How much income could we expect?”
“This is not a complete plan, but rather a very rough estimate. Let’s assume you sell all of your assets and invest the $370,000 in a diversified portfolio of stocks and bonds. Let’s further assume that you pull 3% from this portfolio each year. That would provide you with a little bit less than $1,000 each month,” I answered.
“So, we can retire today if we go live in the middle of nowhere. Maybe we’ll work at least one more year then,” the husband replied with a smile.
The question asked in jest is a great question. In my experience, many people are accumulating money for retirement without a real sense of how the lump sum translates into retirement income. I encourage you to consider the rough estimate above using your own numbers.
Retirement Income Planning is important work when you consider the consequences of either one or both spouses running out of money. We can project forward a likely, probable future, but consider this small sampling of variables that can impact your plan:
- Inflation rates – the effect of rising prices in our economy
- Market returns – the rate of return associated with invested assets
- Interest rates –the rate of return associated with fixed income assets
- Sickness and/or general quality of your overall health
- Longevity – how long will you live?
This is not an exhaustive list. As a start, a reliable plan for this young couple needs perfect assumptions for all FIVE of those variables. Absent a crystal ball, a perfect five-for-five is a dubious outcome.
No one can predict the future, so instead focus on controlling what you can control. It isn’t prudent to rely on projected outcomes for variables you cannot control (like the stock market) to make your retirement income plan work. You cannot control your rate of return, but as a start you can control how much money you put into your plan and you can control how much you spend each year.
- Compile a List of ALL Your Resources – All accounts, current SSA.GOV statement, pensions, and all 401(k) accounts. Convene a family meeting at least once a year to review your resources in the context of your retirement goals.
- Plan all Three Stages of your Financial Life Simultaneously (Accumulation, Distribution and Legacy) – Consider the amounts and the strategic positioning of your assets as you plan through all three stages. With each financial decision, consider the potential impacts to the current stage as well as future stages.
- Cash Flow Management – Retirement savings is planned future spending and/or legacy. Savings doubles as a placeholder in your budget that can help make your transition from accumulation into distribution easier.
Can you retire? Focus on controlling the controllable and put yourself and your retirement income plan on a track for the greatest likelihood of success.
For a more in-depth discussion about your individual Retirement Income Plan or for help developing a Retirement Income Plan, please click the following link and request a no-cost, no obligation meeting with John.
Thank you for reading!