What comes to mind when you think about retirement? Is it travel, a favorite hobby, or spending time with family? Retirement should be about the good things in life. After all, you’ve worked hard for decades to accumulate assets. Retirement is the time to enjoy the fruits of your labor.
Of course, saving money and getting to retirement is only half the battle. After you leave the working world, you will still face risks that could threaten your financial stability. Without a risk management plan in place, you may be unable to enjoy a comfortable retirement.
Behind on your retirement savings? You aren’t alone. According to Gallup’s 2017 study of financial concerns, more than half of all Americans are worried about their ability to pay for retirement.1
If you’re behind on your savings plan, conventional wisdom is to simply save more money. However, that may not be a feasible option. After all, there’s only so much money you can save out of your paycheck. No matter how far behind you are on retirement, you still have to cover current bills and expenses. It may not be possible for you to put more money in a 401(k) or IRA.
Does a significant portion of your retirement assets exist within your 401(k) plan? If so, you’re not alone. Many workers use their 401(k) as their primary retirement-saving vehicle for a number of reasons. You get tax-deferred growth inside a 401(k) plan. You also may get matching contributions from your employer. Those two components can make a 401(k) a powerful accumulation vehicle.
Retirement isn’t only about asset accumulation, though. You certainly need to save a substantial amount of money to fund a long retirement. However, you also need to make that money last. Your retirement could last several decades. If you aren’t disciplined with your spending and money management, your 401(k) funds may not last the long haul.
Are you in the process of preparing for retirement? If so, you may be exploring the various financial tools available to help you manage your assets and income after you retire. From IRAs to insurance to investment products, you have a broad range of tools and products at your disposal.
An annuity is one potential tool to consider. Annuities are often used to generate income, minimize taxes, manage risk and more. There are several types of annuities, but most fall into one of two categories: immediate and deferred.
An immediate annuity is one in which your initial premium is immediately annuitized, or converted into a stream of income that’s guaranteed by the insurance company. For example, you may contribute a lump sum and, in return, receive a monthly payment for the rest of your life.
Are you worried about your money lasting through a long retirement? You have company. According to the 2016 version of Gallup’s annual survey about Americans’ biggest financial worries, retirement topped the list for the 16th year in a row. Nearly two-thirds of respondents said they were concerned about not having enough money for retirement.1
Of course, saving money is only part of the process. Even if you save a significant amount of retirement assets, you still have to carefully manage your spending to make sure your funds last. Even the most substantial nest eggs can be depleted quickly by excessive spending.
That’s why a written spending plan can be so important for retirees. A spending plan serves as a budget and as a guide for distributions from your retirement accounts. You can check your spending against the plan at any time to see if you are on track or if you have veered off course.
Developing a spending plan can be challenging though. You can’t predict the future. You may not know what your spending needs will be as you get older. How do you develop a spending strategy when so many of the variables are unknown?
There are a few different approaches you can take to planning your retirement spending. Below are three strategies commonly used in retirement spending plans. Base your spending plan on your unique needs and objectives. The important thing is to have a plan that works for you and to follow that plan so you can protect your retirement assets.
Perhaps the simplest approach is to assume a level spending amount throughout your retirement. You might base this amount off your current spending, or you could base it off a percentage of your preretirement income. The advantage of assuming a flat spending amount throughout retirement is that it makes it fairly easy to determine whether you’ve accumulated enough assets.
However, there are some issues with assuming a flat spending amount throughout your retirement. One is that a flat spending plan may not account for unpredictable expenses that could pop up in retirement, such as home repairs, medical costs or even the occasional vacation. A flat spending plan also doesn’t account for inflation, which could have a sizable impact on your expenses over the long term. Although a flat spending plan may be simple, it may not be the most accurate approach.
A second approach is to assume your spending needs will increase gradually from year to year throughout your retirement. For example, you might factor your expenses to increase at the same rate as inflation. Or you could build in greater increases in spending in your later years to account for long-term care needs and health care costs.
A plan that incorporates increasing expenses can be helpful, because it accounts for inflation and the possibility that you’ll have increased health care needs as you advance in age. However, you may want to enjoy the early years of retirement, when you are healthy enough to travel and pursue hobbies and other activities. If so, you may not like the idea of reducing your spending in the early years so you can spend more in your later years.
One intriguing approach is to vary your spending from month to month or year to year. For example, if you plan on traveling in the warmer months of the year, you might assume your spending will increase in those months. During the fall and winter, though, you may opt to live on a much tighter budget.
A dynamic spending plan could have behavioral benefits. If you give yourself certain months or periods of time in which you’re allowed to spend more money on fun activities, you might have less incentive to go over budget during other times.
Of course, the tricky part of a dynamic spending plan is that you have to stick to the budget. If you don’t stay under budget during the lean months, you won’t be able to afford the periods of time when you are scheduled to spend more money on vacations or other fun activities. If you don’t have that kind of financial discipline, a dynamic spending plan may not be the best option for you.
Ready to develop your retirement spending plan? Let’s talk about it. Contact us at Sprouse Financial Group today. We can help you analyze your needs and create a strategy. Let’s connect soon and start the conversation.
Licensed Insurance Professional. This information is designed to provide a general overview with regard to the subject matter covered and is not state specific. The authors, publisher and host are not providing legal, accounting or specific advice for your situation. By providing your information, you give consent to be contacted about the possible sale of an insurance or annuity product. This information has been provided by a Licensed Insurance Professional and does not necessarily represent the views of the presenting insurance professional. The statements and opinions expressed are those of the author and are subject to change at any time. All information is believed to be from reliable sources; however, presenting insurance professional makes no representation as to its completeness or accuracy. This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, accounting, legal, tax or investment advice.
16606 - 2017/4/25
Do you believe that you’re unlikely to suffer a disability during your career. You’re not alone. According to the Council for Disability Awareness, American workers on average think they have only a 2 percent chance of suffering a disability during their career. The truth, though, is that the average worker has a 25 percent chance of missing work because of disability.1
Many people assume that disabilities only happen as a result of accidents. The truth is that disability can be caused by a broad range of medical issues. Diseases like cancer or heart disease could force you to leave work so you can pursue treatment. Chronic back or joint pain could grow in severity, limiting your ability to work.