A hot topic among the working class is how much retirement income they are going to need once they retire. While this issue may not lay on the mind of a young worker, it does as some get closer to retirement age. Being that people live many years longer after retirement than what they used to, a lot more money is needed after retirement to live and it is a dollar figure that can seem astronomically high.
In recent years, a lot of emphasis has been put on achieving a certain dollar amount. Many well-known companies have advertised their financial products by telling people they need to reach a specific number to retire the way they want to. There are three issues with this. They are: the insinuation that if the dollar amount is hit a retiree won’t outlive their retirement assets, that there is one set number to hit in order to successfully retire, and that the types of income sources and their amounts are irrelevant.
The perfect example as to why there is a problem with aiming toward a set number is when the Dow Industrial Average dropped a total of 52%. Individuals who retired between October 2007 and March 2009 can tell many workers that reaching that magic number and then being comfortable with the dollar amount could be devastating if something happened to the income sources.
What’s Your Income Number?
Rather than asking what the retirement number needs to be, it is best to ask what the income number should be. This makes a lot more sense since the money that is saved has to produce a monthly income in order to live. Accumulating $1.7 million may not be enough. However, shooting for a monthly income of $4,000 per month for 15 to 20 years or more may be. If you are someone who makes $100,000 per year or more and that’s the lifestyle you want to maintain, then that is the income you need to make your goal.
In order to plan for an income rather than a specific number, a financial planner may be needed. A financial planner can help calculate projected inflation and increases in the overall cost of living. This will give a better idea of what a livable monthly income will be.
Financial Adviser Bias
When choosing retirement products that can create the comfortable income that you need after retirement, know that the bias of your financial adviser can play a role. A study by Cogent Research proved this. The study showed that broker-dealer advisers are more likely to recommend products like variable annuities that are offered by insurance companies. The Independent adviser may also like insurance company products and the registered investment advisor may lean toward products offered by mutual fund companies.
The typical investor does not realize that advisers are very different from one another. This means that many investors do not know the differences between advisers, so they are also unaware of the limitations that the retirement-income planning strategies that are recommended by them are. For instance, working individuals between 55 and 70 may not realize that it is just as important to make investments that deliver above-average returns as it is to generate some guaranteed income. By generating both, a retiree can live off of the guaranteed income while making money through investments. That way if a person lives to be 100, they have the 35 years of income that they need.
In all reality, it isn’t about the types of investment vehicles used to create the income. Instead, it is the actually retirement-income planning that has the most importance. For instance, individuals are able to assume more risk in the first part of the planning stage. They have more flexibility to weather the fluctuations of the stock market. It is when hitting the actual retirement planning zone that it is important to create inflation-protected income that is also tax-efficient.
Fidelity found in a study that 97% of investors felt that protecting against the volatility of the market was the most valuable thing financial advisers could do for them. A large portion of those investors in the study said they would be very interested in retirement products that had monthly guarantees. This is one area that can spell out the differences between different adviser types. If an adviser doesn’t have an insurance license or isn’t affiliated with someone who is, the monthly income products that they have to offer may be limited.
Annual Income Need vs. Nest Egg Requirement
If you do prefer to have a target number, it does depend upon the yearly income you need and how many years you expect to live after retirement. If you retire at 65 and expect to live until you are 82, then you would need a nest egg of $850,000. However, you could live until you are 85. That means you will need a nest egg of $1 million.
If you require a $100,000 per year income then a $1 million nest egg will only work for 10 years and there is a good chance you will live past 75. To cover you until you’re 85, you will need $2 million.
To determine how much you would need for twenty years of income, you can calculate your desired yearly income by the twenty years. However, this once again brings up the point that you should have investments working for you in the meantime in case you do outlive your nest egg. Unfortunately, outliving nest eggs is happening more and more because people are living longer. Twenty years ago, they never dreamed they would live to 85 or 90 years old. Now that they have hit that age, their incomes have declined drastically and they are relying on their families to support them.
If you have a particular number in mind, it is time to start saving if you haven’t. The older you are, the more you will have to save. You will now need to determine what your income sources will be during retirement and start putting money into them. If you wish to attain a $1 million goal and you are 30 years old, you will need to save $440 per month until retirement. If you are 35 years old, you will need to save $671 per month until retirement. If you are 55 and have yet to save toward retirement, $5,500 per month will need to be saved and this is assuming the savings account has an 8% rate of return. Retirement savings accounts can help accelerate the savings for you, so it can pay to talk to a financial adviser about IRAs and other such retirement accounts.