Real life retirement planning
Feb 24, 2017 11:13AM ● Published by Neighbors Magazines
by John Masus
I believe when 401k plans began to replace Defined Benefit Pension plans in the early 1980s, the retirement planning landscape completely changed. With the Defined Benefit pensions, we relied on something else (the pension plan) doing it for us. Whereas the 401k plans were voluntary regarding employee contributions and retirement was a long way off so perhaps we had an “I’ll get around to it soon” attitude. The result is the below statistic. I also believe that the idea of making sure that a 401k particapant contributes at least up to the company match (let’s say the match is 3%) for a total of 6% is only the first step. Very frankly that simply is not enough for secure retirement funding.
So what is enough? I’ll come to that in a moment. First of all, let’s start with realities and challenges.
The more knowledge we have about a subject, the better to make wise decisions. According to the Boston College Center for Retirement Planning, half of all households headed by those age 55 and older have no retirement savings at all and those that do, the median amount was just $148,000. Meaning that ½ saved more and ½ saved less than $148,000. Either way that’s not going to go very far for a 10 to 20 year retirement plan. Here are some issues and challenges that should be considered in the retirement planning process.
• Plan for a long life after retirement. Perhaps 15 or 20 years. No one knows but longevity should be in the plan unless you know better.
• Inflation erodes purchasing power of your fixed income. A 3% inflation rate over 10 years will shrink $100 in purchasing power by at least 30%. So that $100 will only buy $70 in goods and services. Inflation should be part of the plan.
• Medical costs can mount up. According to the Washington Post, a couple retiring today should think about $200,000 plus in medical expenses over the course of their retirement. Deductibles/co-pays etc.
• Additional income is usually needed above and beyond the monthly income just because life is life. Buying a car, replacing a roof, a new washer/dryer. In other words, necessities.
• A distribution rate from your retirement nest-egg might be considered to be around 3.5 to 4% annually over a long retirement period. Each case is different.
• Spending behavior is important. This could be one of the biggest challenges. You are used to that paycheck coming in like clockwork. Now your new income levels are based upon decisions you made years ago. For some of you reading this article, that years ago decision is actually right now.
• Why not start paying the most important bill to the best person you know and begin doing it now. It’s your retirement bill. So pay yourself first. If you know you are saving there is gratification when you realize that you have started something special ….just for you.
So how much to save?
In my opinion, the ideal amount and the ideal way is about 10% of your gross income including the company match if part of a 401k or some similar plan. An additional 5% in after tax money going into a regular investment account. This gives you two types of money. Qualified from the tax deductible company plan and non-qualified from your after tax savings. It’s good to have both at retirement.
Consider a savings target of at least 20 times your income. If you make $50,000 per year think of the target at $1,000,000. A distribution rate of 3.5% per year would be about $35,000 per year. That along with Social Security would be your retirement income. Every case is different but at least this can be used as guideline. Pay yourself first.
John Masus is an LPL registered principal with clients in 24 states. Securities offered through LPL Financial. Member FINRA/SIPC. Masus Financial Group, Ltd. is a Registered Investment Advisor and a separate entity from LPL.Financial. Masus Financial Grp.,Ltd. has been located in downtown Batavia for over 23 years. Email address John.Masus@lpl.com