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Are You on Track with Your Retirement Savings?
- By Travis Echols
- •
- 29 Jul, 2017
Originally written on 9/13/2016.
How to have a prosperous retirement is simple. Save lots of money and invest it wisely. Right?
It's
simple--but not easy. Most people cannot save enough to sustain a
comparable standard of living
throughout a 20 to 30-year retirement. They need their savings to grow.
But without savings, there is nothing to invest. And Americans do not
save near enough. The Employee Benefits Research
Institute reported in 2013 that over 50% of workers had less than
$25,000 saved. Twenty-nine percent (29%) believed that $250,000 was
enough for a comfortable retirement. More than half of U.S.
workers had not calculated what they would need.
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How to assess if you are on track?
JP Morgan provides a chart that can give you a feel for how much savings you need for retirement. Note the assumptions.
First, you need to know your personal financial freedom number. This is the inflation-adjusted monthly income you need or will need in retirement. You can start by estimating your current living expenses. There are two ways to do this: 1) by adding up all your expenses over a long period and divide by the number of applicable months. This will include all monthly bills, quarterly bills, annual bills, and other irregular costs such as home and car repairs, or 2) by backing into your current expenses by taking your after-tax income and subtracting savings or adding a deficit. For example, if you are making $68,000 after taxes per year, and saving $7000/year of that money, then your expenses are $61,000 per year ($68,000-$7,000). If you are dipping into savings $3000 per year, then your expenses are $71,000 per year ($68,000+$3,000).
To calculate your financial freedom number, take your current living expenses and subtract from it expenses that you anticipate will be eliminated or reduced in retirement, such as parking at work, expensive clothes, commute to work, etc.). Then add retirement expenses that are not currently accounted for such as travel expenses, higher health care costs, and long term care costs. Due to health care, your estimated retirement income (financial freedom number) is likely to be just as high if not higher than your current living expenses--but everyone's situation is different.
Now, to assess the amount of income you'll need from your savings, take your financial freedom number and subtract Social Security income, pensions, rental income, part-time employment, etc. For example if you need $6000/month after taxes and your other income streams such as Social Security combine to equal $2500/month after taxes, you'll need $3500 per month after taxes from your savings.
John and Mary are 61 years old and want to retire at age 66. Their current living expenses are $5000/month and they expect their retirement expenses to be $5500/month. This $5500 is their financial freedom number. At age 66, their combined Social Security income is expected to be $3000/month (after taxes). With no other income, their retirement savings will need to produce the remaining $2500/month and increase annually for inflation. But since most all of their money will be in traditional IRAs and 401(k)s, at an effective 20% tax rate, they would have to withdraw $2500/(1-.20) = $3125/month.
Using a conservative inflation-adjusted withdrawal rate of 4.5%/year for 25 years, they would need ($3125 x 12)/.045 = $833,333. If they already have $500,000 in retirement savings, an annual savings goal for the next five years could be calculated, along with the growth of the $500,000. At an average 6.5% rate of return, and if they saved $26,000/year for the next five years, they could confidently retire at age 66.
First, consider all your alternatives as you face retirement. The old rules of retirement may not work for a number of reasons (longer lifespans, fewer pensions, higher healthcare costs, etc.). The risk of running low on income in your retirement years can be mitigated in a number of ways.
- There is phased retirement where you gradually scale back the number of hours or days you work.
- There is part-time retirement where you find a part-time job that frees up more leisure time.
- You could pursue a second career in which you have more control over your activities and time.
- Seasonal work may be a good fit, where you only work a few months out of the year.
- You can also consider a Sabbatical or mini-retirement where you take some time off to do something important to you, or just to relax and re-energize.
Third, don't put your children's education ahead of your retirement. Andrea Browne Taylor says, "Resist the urge to put your children ahead of your retirement savings. Yes, you want the best for your kids. But if you're devoting all of your money to private schools instead of your IRAs and 401(k)s, you may find yourself broke when retirement rolls around."
Fourth, don't plan on saving past age 65. While you may be able to work and save money past age 65, you shouldn't count on it. Unexpected things like health problems and lay-offs often upset people's plans to work longer. At the very least, have a backup plan for retiring earlier, just in case.
Fifth, take advantage of catch-up contributions in retirement accounts. In 2016, for workers age 50 or older, qualifying individuals can contribute an additional $1000/year in IRAs, $6000/year in 401(k)s, 403(b)s, 457s and SARSEPs, and $3000/year in a SIMPLE plan.
Casey Dowd writes for Fox Business News, "For Boomers who may be feeling behind on their savings, the secrets to catching up are grounded in common sense, yet are infinitely easier said than done. Steps include: working longer and delaying full retirement, saving more, spending less, planning well, and investing wisely."
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- Liquidity--Retirement assets are not being locked up or annuitized such that capital is not available for emergencies.
- Income—Using an optimized withdrawal rate, an increasing income is produced to combat inflation (unlike many pensions, bank and insurance strategies that are not inflation-adjusted).
- Growth--assets that can combat inflation over a 20 to 30-year period, giving the retiree more income and upside potential under normal and good economic times.
- Safety--manages the myriad of investment risks like market risk, inflation risk, and credit risk. Under worst-case scenarios, if withdrawal amounts are adjusted by using guardrails, the portfolio can still provide a lifetime income.
Here is an executive summary of how to build up a portfolio for retirement in seven steps.
1. Values clarification and goal-setting . Figure out the income objective and capability of your retirement assets in lifestyle terms, then financial terms. In other words, set realistic, specific, financial goals based on your core life values.
2. Asset allocation glide path . Figure out how to diversify your retirement assets among stocks, bonds, and cash, based on your age, risk tolerance, retirement goals, and changing market values.
3. Valuation-dependent efficient frontier . Figure out which areas of the markets are historically inexpensive, and which are historically expensive. Don’t take on more volatility than you need to for the growth you need or desire.
4. Multi-asset class approach . Diversify one more step for more growth and less volatility. Put more money in the specific market areas that are less expensive and less money in the specific market areas that are more expensive.
5. Tax-aware asset location and distribution . Save as much on taxes as possible by figuring out which type of investments should be held in which types of accounts. If you are drawing an income from your assets, figure out the least-costly order for making withdrawals.
6. Investment selection based on account type (qualified, nonqualified) and asset-class propensity and magnitude of outperformance (passive, factor, managed, etc. ). Figure out what kind of investment to use (index mutual fund, factor mutual fund, actively managed mutual fund, single factor ETF, multifactor ETF, passive ETF, individual stocks, individual bonds, Unit Investment Trust, closed-end fund, etc.) based on the account type, asset class, and growth and income needs.
7. Rules-guided rebalancing based on retirement glide path and multi-asset-class approach . Readjust the investment mix based on your changing personal situation and changing market values.
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Here is a summary of the details backing this approach. Also, click here for more background information regarding my investment philosophy.
1. Values clarification and goal-setting
Investment planning for (or in) retirement starts with retirement planning. You start with thinking about your life goals...your dreams...your ideal life in retirement. It could involve doing no work, working part-time, or doing seasonal work. Your ideal life could be going back to school, spending more time with family, traveling, ministry, etc.
Ask yourself questions like, "What would I want to do if I
didn't need to work for money?" or "What are the most important
dangers, opportunities, and strengths I need to address?" or“Ten years from now, if I am looking back on a successful
ten years, what will I have achieved?”
This conversation allows you to create specific
goals around your most cherished values. And your goals will be unique to you.
You then design an investment plan to help you live your ideal life.
This kind of goal-focused, plan-driven approach minimizes the
chances of making bad investment choices based on current events and emotions.
Instead, you can choose and maintain the
specific mix of investments that can best deliver the results you need--using a
disciplined, research-driven approach.
2. Asset allocation glide path
The next major question is what kind of investments do you need to meet your goals. All investments have risk. Even "safe" investments over long periods have inflation risk. No single investment delivers growth, high income, and safety of principal. The key is designing a portfolio that balances them in a way that supports your retirement objectives.
And this mix may change over time. For example, for most people, it makes sense to gradually decrease their exposure to high-growth, high-volatility assets like stocks (i.e., equities) as they approach retirement. In retirement, it is usually best to maintain a flat equity glide path, dynamically adjusted for valuation. This approach protects you from the retirement-danger-zone risks of portfolio size effect and sequence risk, while allowing you to take advantage of bear markets and market corrections. See How to Navigate the Retirement Danger Zone .
Protecting your lifetime retirement savings from excessive taxes is a crucial part of holistic financial planning. This involves protecting your IRA, 401k, lump sum pension rollover, Social Security, and any other type of retirement account or income stream from crushing tax rates.
So let's be sure to differentiate tax preparation
from tax planning
.
Tax preparation , also called tax return preparation, looks backward, one year at a time, to get the numbers right to accurately calculate your tax liability (and how much you owe or overpaid).
Tax planning on the other hand looks at taxes in the context of your overall financial picture. A tax planner not only looks in the rear-view mirror but will look forward 20 to 30 years at your projected tax liability and ask what can be done to lower your lifetime tax bill.
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If you have savings outside of pretax retirement accounts invested in capital assets (like stocks, bonds, ETFs, mutual funds, precious metals, jewelry, and real estate) which have large unrealized capital gains, this article is for you. You may be missing the opportunity to pay zero taxes NOW instead of 15% or higher rates in the future. Sign up to receive my free monthly email articles on retirement planning--no cost, no obligation
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Originally written on Aug 2, 2018 and updated for tax law changes.
If you are no longer working and have reached the age of 72,
you probably know about Uncle Sam’s rule for you to take a Required Minimum Distribution
(RMD) from your traditional and rollover IRA(s) each year for the rest of your life. You can always withdraw more,
but this requirement is the minimum
you must take or be severely penalized. Fortunately,
this rule does not apply to Roth IRAs. (The SECURE Act of 2019 changed the starting RMD age from 70½ to 72 starting in 2020, but fortunately you can still make a Qualified Charitable Distribution (QCD) starting the year you turn 70½.)
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If you have delayed paying taxes in your pretax IRA, 401(k), or 403(b), etc, there comes a time when the IRS wants their taxes. And if you don’t give them their taxes based on their required withdrawal schedule, you'll get hit with a 50% penalty on top of what you owed.
Along with Social Security and other retirement income, this RMD can significantly raise your tax rate. Also read How to Dodge the Social Security Tax Torpedo . There are not many ways to reduce this tax burden. In the past, retirees have used various deductions including charitable cash contributions and gifting of highly appreciated assets to charities. (The latter not only gives you, the donor, a deduction but also avoids a long-term capital gains tax bill.)
However, with the passing of the Tax Cuts and Jobs Act of 2017 (TCJA) , with its almost doubling of the standard deduction, itemizing deductions won’t make sense for near as many retirees. Ah, but there is still a strategy. But first let’s better understand the RMD.
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The latest book I am reading is “ The Psychology of Money ” by Morgan Housel. Chapter 3 is entitled “Never Enough”. In this chapter, Housel talks about when rich people do crazy things. He tells stories of wealthy people who never had a sense of enough and wrecked their reputations, families, freedom, and happiness because of it. I have also talked to older couples who tell me they once had a much better retirement in view, but the quest for more led them to make unwise investment decisions that left them financially crippled in retirement. The importance of knowing when you have enough is not only vital to when you retire but also how you retire. It can affect how you invest, how you withdraw, and your overall satisfaction before and during retirement. Be sure to read to the end where I summarize a few key takeaways. Housel makes the four following observations in chapter 3 of his book. Sign up to receive my free monthly email articles on retirement planning--no cost, no obligation
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Whether you do mini-Roth conversions over several years or big Roth conversions in a few strategic years, the Roth conversion strategy could save you tens if not hundreds of thousands of dollars over your retirement. This article will get deep into the issues of Roth conversions for retirees and the ten steps to take to be sure it is done properly. Be sure to scan or read to the end where I will give you the simple answer to getting your Roth conversion questions answered. Sign up to receive my free monthly email articles on retirement planning--no cost, no obligation
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Making big financial decisions immediately following the death of a close family member can be dangerous. It is often best to allow some time before tackling big financial decisions. On the other hand, some people find getting immersed in the finances is helpful in coping with the loss. Whatever way is best for you, you will need to give it your
careful attention to avoid big financial mistakes. The different types of accounts have different rules. I'll address the most common types. In the case of the death of a parent or anyone other than your spouse in which you are a non-spouse beneficiary, there are many rules that you must know to make the best decision for you and your family. (In this article, I use the common parent-child inheritance, but the planning strategies can apply to other non-spouse situations.) Your decisions can have major tax and investment consequences, both now and in the future. And some of these decisions have time deadlines keyed to your parent’s date of death. Also, some of these decisions are irreversible. You can download my free Estate Planning Survivor Checklist here
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So, you don’t want to rush in and make decisions without knowing the rules, and you don’t want to wait too long and be stuck with fewer options. (In this article, I am not addressing estate taxes. As of 2021, only estates valued at $11.70 million or more are subject to federal estate tax. But there are plenty of other tax pitfalls to navigate around. I am also going to focus on liquid savings like investment and retirement accounts, versus real estate which will be for another time.) Sign up to receive my free monthly email articles on retirement planning--no cost, no obligation
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Delaying Social Security makes a lot of sense for many retirees; but there are common pitfalls that can cost you a bundle. As you know, the longer you delay your Social Security Retirement benefit, the higher your lifetime monthly payments are figured to be. This increase in delaying continues until age 70, after which there are no further increases for delaying. This increase for each month that you delay filing is not small, especially considering the current low interest rates. Even after full Social Security age, your payment goes up by 8% per year until age 70. Sign up to receive my free monthly email articles on retirement planning--no cost, no obligation . Here are the five big mistakes of delaying your Social Security retirement benefit. |
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Are you wondering about the impact of the
2020 election results on your retirement? If so, you are not alone. The two political parties are greatly polarized. While the Democrat party has moved further toward ethno-centric socialism, the Republican party has moved further toward nationalistic populism. The difference in the two parties’ goals for our country is wider than ever. Sign up to receive my free monthly email articles on retirement planning--no cost, no obligation . |
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Investment Advisory Services offered through JT Stratford, LLC. JT Stratford, LLC and Echols Financial Services, LLC are separate entities.
Serving Cumming, GA, Forsyth County, and the surrounding areas of John's Creek, Alpharetta, Milton, Duluth, Buford, Suwanee, Flowery Branch, and Gainesville
