Whether you are a successful self-employed professional with a private practice, or a highly compensated employee, everyone wants to know how much they need to retire comfortably. And just like your day-to-day lifestyle expenses will vary drastically based on your personal preferences, income level, and profession, so will your retirement lifestyle and required savings.
At Meridian Wealth Management, we understand that each client is unique and there’s no one-size-fits-all answer to the retirement planning question. But you can get a basic idea of your retirement needs by evaluating your answers to a handful of key questions. Here are 11 questions to consider to determine what a comfortable retirement looks like for you.
1. What’s Your Ideal Retirement Date?
Your age (now and in retirement) is one of the most significant factors to consider when determining how much money you need to save. If you want to retire early, you’ll have fewer years to save for a longer retirement. And if you start claiming Social Security benefits before full retirement age, you’ll also have to factor in a smaller monthly benefit amount.
The state of the stock market can also play a role in how much money you need and how long your money lasts. A Vanguard study found that you have a 31% higher chance of running out of money if you retire near or during a bear market. Of course, you have no way of knowing if we’ll be in a bear or bull market when you retire—but this is a scenario you must account for in your retirement planning.
2. What Do You Want Your Retirement Life to Look Like?
Have you thought about the type of lifestyle you want to have in retirement? If you know you want to travel, play golf, or spend time with your grandkids, you need to factor in what that looks like and how much it will cost.
For example, if you plan to travel, you’ll need to consider:
Even if your dream is simply to spend time with your grandkids, you’ll still need to think through your expectations and expenses. To some people, “spending time with grandkids” means babysitting a few times a week. To others, it means footing the bill for all-expenses-paid trips to various destinations of their choosing. Whatever it is you want to do with your time, map out the details so you can have a clear picture of how much you’ll need to make it a reality.
3. What Are Your Sources of Retirement Income?
Most clients will have several sources of retirement income including Social Security payments, employer-sponsored retirement accounts, annuities, and distributions from personal investment portfolios. Some clients will even continue to bring in a paycheck by working after they’ve officially retired.
Regardless of whether you work or fully retire, it’s crucial to evaluate all sources of income and assess your likely expenses to create a pro forma income and expense statement. Understanding roughly what you expect to bring in versus how much it will take to live the lifestyle you prefer is the first step in building a unique retirement plan. You’ll be able to determine how much, if any, you will need to withdraw from portfolio assets to meet your expenses.
4. How Much Debt Do You Carry?
Even as a highly compensated employee, you may find yourself bringing debt into retirement. This can have two major drawbacks:
1. It reduces the amount of cash flow you have for housing, travel, hobbies, and other non-essential purchases.
2. It can potentially drain your retirement savings quicker, which means you may run out of money or have to adjust your lifestyle down the road.
If you carry debt, take a close look at what you owe and figure out how much cash flow you’ll need in retirement to cover these expenses. Some people prefer to pay off any high-interest consumer debt before they retire. Others will take it one step further by paying down their mortgage and auto loans too.
5. What Kind of Healthcare Coverage Do You Expect to Have?
Right now, you most likely have health insurance through your employer. When you stop working, you’ll need to obtain healthcare coverage another way. You may be able to hop on your spouse’s plan, if he or she is still working. Or you can get coverage through the healthcare marketplace. You qualify for Medicare starting at age 65, but even then, you may want additional coverage to pay for prescription drugs, dental care, eye exams, and other expenses.
Retirees sometimes fail to fully plan for expenses during the later stages of retirement, and medical care often tops the list. It’s estimated that retirees will use 15% of their income for health expenses, and the average retired couple could see healthcare expenses of approximately $300,000 after age 65. Don’t let this be a planning oversight that prevents you from retiring comfortably!
6. What Impact Will Rising Costs and Taxes Have on Your Retirement?
Not only do you need to plan for basic healthcare expenses, but you must also factor in the impact of rising costs. We have seen historically high levels of inflation over the past year, which has driven the cost of everything up significantly. Though this level of inflation will not last forever, even a more conservative 3.8% increase each year can drastically affect the longevity of your retirement income.
Not only that, but healthcare costs tend to rise faster than inflation and they can become a huge burden later in life if you’re not taking proactive steps to save today.
Retirees should also consider the impact of taxes as they plan for future retirement withdrawals. Because different financial accounts are taxed at different rates, it’s important to structure your retirement withdrawals in a tax-efficient way.
Traditional IRAs and 401(k)s are taxed at the ordinary income tax rate when you withdraw. Roth IRAs and Roth 401(k)s are taxed beforehand, so the money is withdrawn tax-free. Funds in a taxable investment account are taxed at the capital gains tax rate, which is different from your ordinary income tax rate.
By understanding the tax characteristics of your retirement income, you can plan ahead and avoid a hefty tax bill.
7. Will You Have Any Dependents?
Your kids may be grown and out of the house by the time you retire, but that doesn’t necessarily mean you’ll stop supporting them financially. Over 79% of parents said they still give financial support to their adult children (ages 18 to 34), according to a Merrill Lynch study, and the COVID-19 pandemic caused a boomerang effect, with 67% of adult children still living at home with their parents after returning home in need of financial help.
8. What Type of Legacy Do You Want to Leave Behind?
Even if you aren’t helping your kids out with daily expenses, you may want to contribute to their weddings, home purchases, or leave a lasting legacy down the road. As difficult as it may be, it’s important to think about the type of inheritance you want to leave behind as you plan for retirement. Not only will this inform the amount you must save, but it will also affect your estate plan and should be factored accordingly.
If you plan to leave tangible assets like real estate to your kids, be sure the assets are structured properly to avoid probate. Similarly, if you have substantial financial assets that near the estate tax exclusion of $12.06 million per person, you should consider trusts and other estate-planning techniques to reduce your tax liability and ensure your legacy goals are accomplished according to your wishes.
9. Where Will You Live?
Housing may be your biggest expense in retirement. And even if your home is paid off, you might want to consider downsizing to a smaller place that requires less maintenance and has cheaper utility costs.
To save even more, you can think about relocating to an area that has an overall lower cost of living. For example, the cost of living in Orlando, FL, is only 3.3% higher than the national U.S. average, whereas the cost of living in Los Angeles, CA, is 76.2% higher than the U.S average. As you can see, where you live can make a huge impact on the overall cost of retirement.
10. What Is Your Family’s Health History?
The average 65-year-old man has a 35% chance of living until age 90 ; that rate goes up to 46% for a woman the same age. And while life expectancy is unpredictable, if your family has a strong history of living to age 90 and beyond, your chances may be even greater than these odds. In this case, you’ll need to determine if your planned retirement savings will last long enough.
Similarly, if you have known health conditions and/or a family history of health problems that could affect your life span, you’ll want to consider this too.
11. Is Your Portfolio Set Up for Rebalancing?
We’ve all heard about the importance of diversification when it comes to maximizing our investments. But as you get closer to retirement, it’s even more important to make sure you are investing in the right types of holdings. This is the time to reduce your risk and ensure that you have the right asset allocation. In this way, you can minimize the impact that any one losing investment can have on your overall portfolio performance.
Rebalancing is also a key factor in keeping your portfolio safe. It’s not enough to create proper diversification and just walk away. You need to regularly analyze your portfolio to ensure that it lines up with your risk level and that you haven’t become too reliant on any one asset category.
Your Unique Retirement Needs a Unique Plan
There is so much more that goes into retirement planning than any one-size-fits all formula can tell you. On the contrary, to fully understand your retirement savings, it requires a deep dive into your financial situation, family history, and goals.
At Meridian Wealth Management, we can help you build a customized retirement plan that factors in these questions and more. To start planning your ideal retirement, schedule a free 15-minute consultation or reach out to us at 888-495-5484 or firstname.lastname@example.org today.
Tom Zebroski, Managing Partner and Financial Consultant at Meridian Wealth Management, spent 10 years at Microsoft Corporation before he finally decided to follow his childhood dream of becoming a financial advisor.
Tom attended the University of Washington (Go Dawgs) where he earned a Bachelor of Arts in Business Administration. His concentrations were in finance and accounting.
After completing postgraduate work in financial planning at Seattle University, Tom was hired as a financial consultant at A.G. Edwards & Sons. He worked there for a couple of years before becoming a vice president at Charles Schwab.
It was during his decade-long tenure at Charles Schwab that Tom met John Grubbs. They both had long-term goals of being independent financial advisors, so they ditched the corporate world in 2017 to launch Meridian Wealth Management.
Fast-forwarding to today, Tom loves the positive impact he’s able to make in his clients’ lives. He enjoys helping them tackle big problems like figuring out how to build wealth for retirement or pay for their children’s education. He’s built lifelong relationships with many of them and gets a lot of satisfaction from feeling like he’s making a difference in their lives.
In keeping with his desire to “give back”, Tom became the founding Director of the Personal Financial Planning program at Central Washington University in Ellensburg, Washington. He helped establish the college of business’s CFP® Board registered financial planning program, worked on curriculum development, taught courses in financial planning and investments and became a friend and mentor to many of the next generation of financial planners.
Tom lives in Gig Harbor, Washington. He has two beautiful children, a three-year-old granddaughter and a one-year-old grandson both of whom he adores, and more friends than anyone deserves. In his spare time, Tom enjoys cooking, playing golf, reading (he is a lifelong learner), and playing the piano.
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[ii] How to plan for Rising Health Care Costs. Fidelity. (2022, May 25). Retrieved November 4, 2022, from https://www.fidelity.com/viewpoints/personal-finance/plan-for-rising-health-care-costs
[iii] Inflation rates in the United States. Worlddata.info. (n.d.). Retrieved November 4, 2022, from https://www.worlddata.info/america/usa/inflation-rates.php
[iv] Person. (2022, August 30). Inflation is (finally) hitting health care. Advisory Board. Retrieved November 4, 2022, from https://www.advisory.com/daily-briefing/2022/08/30/healthcare-costs
[v]The Financial Journey of Modern Parenting – Merrill Lynch. Merrill Lynch. (n.d.). Retrieved November 4, 2022, from https://mlaem.fs.ml.com/content/dam/ml/registration/ml_parentstudybrochure.pdf
[vi] Jdickler. (2022, September 6). 67% of pandemic ‘boomerang kids’ are still living with mom and dad. CNBC. Retrieved November 4, 2022, from https://www.cnbc.com/2022/09/06/many-pandemic-boomerang-kids-still-live-with-mom-and-dad.html
[vii] 2022 Cost of living calculator: Orlando, Florida vs Los Angeles, California. 2022 Cost of Living Calculator: compare Orlando, Florida to Los Angeles, California. (n.d.). Retrieved November 4, 2022, from https://www.bestplaces.net/cost-of-living/orlando-fl/los-angeles-ca/100000
[viii]What’s your retirement number? no, not savings — life expectancy.
Mortgages, Loans, Home Buying & Refinance Mortgage Company. (n.d.). Retrieved November 4, 2022, from https://www.rate.com/research/news/retirement-expectancy#:~:text=Age%2090%20isn’t%20some,woman%20the%20%20odds%20are%2046%25
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