Prior to liftoff, a pilot will run his aircraft through a series of checks to ensure the plane is in tip-top shape for a safe and efficient flight. Once airborne, the pilot navigates the plane while avoiding weather, traffic, and other pitfalls that could jeopardize the success of the flight.
Financial planners have named the five years up to retirement and the five years into retirement as the “Retirement Red Zone.” Here are a few preflight and inflight checks to help make for a successful retirement flight.
Most Americans define retirement as a goal where they continue their current lifestyles without having to work. Instead, their assets work for them. For most of your working years, retirement is something in the distant future. However, to achieve a successful retirement, you must be as diligent as a pilot.
Financial planners have named the five years up to retirement and the five years into retirement as the “Retirement Red Zone.” Here are a few preflight and inflight checks to make for a successful retirement flight.
Debt.org states, “A generally accepted rule of thumb for retirement planning is that you should have, at minimum, 80 percent of the yearly salary you earned while working. This is sometimes called ‘replacement income.’”
On average, retirees spend around 80% of what working households spend annually. Research shows the first few years are often the most expensive years of retirement. That’s because many retirees will consider retirement an extended vacation at first.
I often ask people, “What is the most expensive day of the week or the month for you?” Most will say Saturday, when they might play a round of golf or tennis, have lunch with friends, then head out to dinner and a show. That’s when I explain that in retirement, every day is Saturday.
Work with your financial planner to determine your retirement income. Take your annual income needs, subtract out pensions, Social Security, and other non-savings sources of income. The remainder will be the amount you need to generate from your investment assets.
How much should you withdraw per year in retirement? According to Investopedia, “The 4% rule says you should withdraw 4% of your portfolio each year in retirement for a comfortable life. This rule was created using historical data on stock and bond returns over a 50-year period.” This first year’s withdrawal rate to a limit of 4% of your total portfolio is adjusted for inflation thereafter. This will help give a retiree the greatest success for a 30-year retirement period.
Asset Allocation Adjustments
Most portfolios during working years are heavily focused on stocks. A fairly old and mostly outdated rule of thumb is simply to use your age to determine bond allocation (i.e. a 75-year-old retiree would have 25% in stocks and 75% in bonds).
In a low interest rate environment like we’ve had for the last 10-plus years, bonds have not been able to provide enough income to stay ahead of inflation. Work with your financial professional to determine what asset allocation is needed to sustain your income needs. Investing in high-quality domestic companies that provide dividends to stockholders can be a great way of helping to stay ahead of the inflation curve.
Especially one to two years out from retirement, you should sharpen your pencil and be diligent in listing your current expenses. You should decide which are absolutely necessary (groceries and housing) and which are discretionary (eating out, travel, and hobbies.)
Many people today use credit cards for everyday expenses to accumulate reward program points. Make sure you complete a line-by-line review of your monthly expenses, giving special attention to holiday months when expenses increase. Consider paying off home mortgages, auto loans, and other consumer debt lines as you approach retirement.
Consolidating various accounts can help simplify your budget and keep better track of your investments. Consider rolling over company 401(k)s to a self-directed IRA that can offer lower fees and more investment choices. Finally, have your financial planner verify your budget to make sure your numbers account for inflation and possible expenses you may have overlooked.
Perhaps the single largest expense in retirement will be health care expenses. Medicare can cover some costs, but you may still wish to consider Medigap insurance.
Typically, Medicare starts at age 65, but if your situation is different, you may need to plan for other types of coverages. Consideration should be given to a long-term care insurance policy. According to the Department of Health and Human Services, 70% of those over age 65 will need some amount of long-term care.
The ideal age to purchase this type of insurance is in your mid-50s. There are numerous types of long-term care insurance, so consult with a professional to see what is right and affordable based on your situation.
Liftoff and Market Timing
A plane loaded with passengers, cargo, and fuel is most vulnerable to mishaps on takeoff. In the same way, your retirement plan is most vulnerable the first five years of living off your investment assets.
If market loss occurs in the first few years of retirement, the impact may be severe enough to alter your plan for years to come. Work with your financial professional to ensure a portion of your investment portfolio is protected from loss, allowing for fixed expenses to be met with guaranteed income sources. Having fixed expenses covered by reliable income sources can help you weather a severe market downturn.
Like any good pilot does once airborne, a good retirement plan will need numerous updates along the way. Changes in taxes, inflation rates, market performance, and health are just a few possible storms that may require deviations along the way. Work with a reputable financial planner to help you achieve a successful flight, knowing that it’s too important to be left to chance.
This content was brought to you by Impact PartnersVoice. Investment advisory services offered through Catalyst Wealth Management, LLC. Securities offered through Kalos Capital, Inc., member FINRA/SIPC, located at 11525 Park Woods Circle, Alpharetta, Georgia 30005, (678) 356-1100. Catalyst Wealth Management, LLC is neither an affiliate nor subsidiary of Kalos Capital, Inc. You can check the background of either firm on FINRA’s BrokerCheck. GA Insurance License #741654. DT1033513-1220