Comprehensive Financial Planning is an exercise in problem-solving. At the basic level, the retirement problem/goal we all face is to create a lifetime income sufficient to outlast a minimum 30-year post-retirement life. Thanks to advances in health, safety, and nutrition, coupled with reduced lifetime physical challenges (resulting from working in the information age), significant numbers of retirees are lasting more than 30 years.
Pew Research projects a quadrupling of centenarians (people aged 100 and above) over the next 30 years. Hopefully, Retirement Income Planning will have been a priority for this group. They will need it for the long haul.
Given America’s range of lifestyles and geographic locations, the cost of living comfortably during post-working years must be determined individually. Ipso facto, step one in Retirement Income Planning is estimating your own income needs. Most people are somewhat unaware of their current spending habits, causing us to recommend journaling. Understanding current spending helps with developing future plans.
Once a future spending goal is determined, saving and investing begins. This is the problem-solving portion of Retirement Income Planning. Most Americans should try to retire with more than one form of income. Lifetime pensions provided answers for prior generations, but pensions are rare these days. Social Security contributes, but it was never intended as a complete plan.
We subscribe to the “4% rule,” which states that your investments should safely provide 4% of their face value as lifetime annual income. Multiply your planned annual income by 25 to determine how much you will need to save for retirement, which is generally a dauntingly large number. But, it is not the whole story.
With pensions and annuities (including Social Security), 25 times the annual benefit payout is a number we call Equivalent Net Worth or ENW. Because pension and annuity income is guaranteed throughout your life, no personal assets (equities, bonds, and qualified plans) are required to produce that income. In Retirement Income Planning, your ENW number is subtracted from your overall needed investment and saving portfolio value. For example, a Social Security annual benefit of $36,000 reduces assets needed by $900,000 (25 times $36,000).
After applying the ENW calculation, the targeted asset pool should appear much more attainable, resulting in fewer discouraged savers and investors. We can help savers and investors understand how to fund a successful retirement. It may not prove as difficult as you fear.
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