By Stephen V. Kenney, CFA, CFP
Gray Private Wealth, LLC
“Will I have enough?” It’s an important question to ask when thinking about retirement. Coming up with a realistic assessment of whether your savings will be sufficient to cover your spending needs during retirement is a complex exercise. First, it requires you to look into the future and estimate post-retirement expenses. Then it requires a prediction of the rate of growth of your retirement savings during your retirement years.
Many people expect that their annual spending will decrease during retirement. But is that realistic? Increased leisure time during retirement will bring many new opportunities which may end up adding to your spending in ways that you haven’t anticipated. Travel expenses, for example, may increase with more time to vacation or visit family. In another category, medical care costs have the potential to become a larger part of the retirement picture than expected. Even with Medicare or other government-provided healthcare, out of pocket healthcare costs continue to grow for most people. If you plan to retire before being eligible for Medicare and will shop for a private insurance program after employer coverage ends, you may find annual premium costs shocking. Even with a good handle on expenses, it will be important to factor in today’s higher rate of consumer price inflation. At a 2% rate of inflation, the price paid for goods or services today will rise nearly 50% in 20 years.
As you look into the future to estimate your spending, you must also ask how long that future will be. Does your retirement plan reflect a realistic estimate of your longevity? The Social Security Administration’s current life expectancy tables estimate that a 65-year-old male can expect to live past age 84, and a woman of that age can expect to live beyond 86. Looking further, a 65-year-old male has a 22% chance of living past age 90. For couples, there is a 47% chance that one partner will reach 90, and a 20% chance one partner will live to age 95.
On the savings side, it is important to have a strategy for withdrawing from retirement savings accounts. This goes beyond the mandated minimum distributions. Income tax consequences and estate planning objectives may mean certain accounts should be depleted before others.
These are just some of the variables that need to be considered in a comprehensive retirement plan. An experienced financial planner can work with you to put “numbers to paper” and create multiple scenarios of different spending levels or investment return assumptions to test the plan. We believe it is important to be conservative when projecting expenses and investment return assumptions. We also believe strongly in looking at “stressed” scenarios to consider the effect on the plan resulting from unexpected expenses or lower than average future returns in the investment markets.
Putting together a comprehensive, yet flexible plan is a critical step in preparing for retirement. It requires a lot of effort up front but can provide peace of mind as you enter the next phase of your life.
Stephen Kenney, CFA, CFP is Chief Compliance Officer & Director of Client Development at Gray Private Wealth, LLC, a wealth management advisory firm located in Canton, MA. He can be reached at (781) 232-2020 or info@grayprivatewealth.com.
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