The average person buys a dozen cars in their lifetime. But unlike cars, you only get one retirement. How do you know if you’ll have the right plan? You want an income plan you can “drive” the rest of your life. To make smart choices, you need to take advantage of an advanced retirement modelling approach—a way for you to sit in the driver’s seat of your own retirement and personally test the fit and feel of a number of plans to find the best one for you. Let’s call it the “Retirement Test Drive.” During this “test drive,” you need to answer 4 key questions that will certainly impact your plans as you face the retirement years:
- What sources of income will I rely upon in retirement?
- Will my income and assets last for my lifetime?
- What annual expenses can I expect?
- What are the risks that I will face in retirement?
You’re wondering how and when you can retire—and if you can afford to maintain your current lifestyle in retirement. The best part of the Test Drive? You’ll drive away with a retirement road map to help you get on the right track—and stay on track—to reach your personal retirement goals. So, are you ready? Be sure to buckle-up because this road can get a little bumpy.
What Are The Risks?
Let’s first consider the roadblocks to a financially secure retirement. There are risks that you can control, and other risks that you cannot control. The risks within your control include not saving enough for retirement, retiring too early, and spending too much during your retirement. Risks that are generally out of your control would be longevity, inflation, market uncertainty, and long-term illness.
The Society of Actuaries recently released their National Vital Statistics Report showing that a woman who is currently age 55, can expect to live to age 83.9. For 55 year old men, they can expect to live to be 80.6 years of age. So, if you retire at age 65, you have 15-20 years of retirement years that require careful planning.
We must account for inflation when assessing retirement needs. The U.S. Bureau of Labor Statistics released a study in 2014 showing a 103% increase in the cost of healthcare, a 95% increase in fuels and utilities, and an overall 58% jump in goods and general services dating back to 1995. The Consumer Price Index for all urban consumers from 1914 through 2014 has reflected an average annual inflation rate of 2.8%. According to the Federal Reserve and Bank Rate, a 7% annual income derived from a $100,000 investment in cash deposits in 1995 would now yield less than $1,000, reflecting the effect of inflation over time.
The cost of healthcare has sky rocketed over the last decade. The Assisted Living Federation of America recently conducted a “Cost of Care” Survey which claims 70% of people over age 65 may need long-term care services. The survey shows that the average nursing home stay is about 2 1/2 years, while the median assisted living stay is almost 2 years. The 2014 survey states that the median annual cost of nursing home care is now at $87,600.
Ok, let’s take a break from the ugly truth about risk, inflation, and rising healthcare costs, and focus on some more positive things! You’re passionate about your grooming business, and working with your customer base. You’re also focused on producing an income level that matches, or exceeds the level of work that you put into your business. However, not all income is the same. There may be a variety of income streams that one may rely on in the retirement years including: Social Security, dividends and interest from your investments, annuities, pensions, real estate investments, etc.
Guaranteed Vs. Non-Guaranteed Income
During the Retirement Test Drive, you must consider your guaranteed and non-guaranteed sources of income. Guaranteed income pays like a paycheck. Even though there may be fluctuations in your business volume, you should be able to count on some regular intervals. Your Social Security benefit, and a personal annuity agreement are also included in the guaranteed income column.
According to the Social Security Administration, the maximum annual payment for 2015 stands at $31,956, while the average 2015 payment will be $15,936. Non-guaranteed income sources are generally derived from investments and vary in pay depending on investment returns. These non-guaranteed sources of income may include retirement savings plans, real estate, and sale of your business.
It was definitely more fun considering your sources of income as opposed to the negative factors, right? Sorry, but we have to be realistic here and include your expenses as well. Basic living expenses may include food, housing, transportation, healthcare and other insurance premiums, and the repayment of debt. Generally speaking, you will want to have 3-6 months of emergency cash on hand (as a safety net) in the event of poor health, or loss of business income.
If you’re wondering how you can close any income gap you may have, here are the 5 steps you can take:
- Work longer, or work part time during retirement.
- Reduce your discretionary expenses.
- Pay off debt.
- Cash in a life insurance policy.
- Downsize your home.
Other steps to consider would be to plan your withdraws; don’t withdraw too much too soon. Set a withdraw rate for the year, and stick with it, even if your investment value goes down.
The U.S. Bureau of Labor and Statistics released a Consumer Expenditure Survey in 2013 showing the average annual expenditures by age. People aged 45-54 required an annual income of $60,524 to meet their financial obligations, while people age 65-74 only need $46,757 to maintain their current lifestyle. The report showed the annual income need decreasing even further to $34,382 for those age 75 or older. Some disciplined planning today could have a significant payoff down the road.
How to Get Started
Make a list of all your expenses and categorize them as needs and wants, gather information about your retirement income sources, complete a retirement income evaluation information sheet, and mail or drop off your information and any accompanying statements to your financial advisor. You and your advisor should meet periodically to review and update the analysis and recommendations.
***The concepts illustrated here have legal, accounting, and tax implications. Neither Janney Montgomery Scott LLC nor its Financial Advisors give tax, legal, or accounting advice. Please consult with the appropriate professional for advice concerning your particular circumstances.
Established in 1832, Janney Montgomery Scott LLC provides comprehensive financial advice and superior service to individual, corporate and institutional investors. A full-service, financial services Firm, Janney is committed to providing our clients advice through a wealth management approach by focusing on the delivery of strategic financial plans that utilize a variety of financial products and services best suited to help meet their financial goals. Janney is equally committed to providing our corporate and institutional clients objective advice for the successful execution of their unique business plans. Janney provides advice and service to clients through a network of professionals in branch offices located along the entire east coast. Janney is an independently operated subsidiary of The Penn Mutual Life Insurance Company, one of the largest mutual insurance companies in the nation, and is a mem¬ber of the New York Stock Exchange, Financial Industry Regulatory Authority and the Securities Inves¬tor Protection Corporation. Janney Montgomery Scott offers individual and institutional clients a full range of investment opportunities for their personal and professional financial needs. www.StoufferGarvinFinancial-Janney.com