Americans face a complex challenge:
Millions of Baby Boomers are at or nearing retirement and face the challenge of securing an income stream that lasts their entire lifetime. The biggest fear for these clients is the fear of running out of money!
On average, most boomers parents and grandparents retired at 65 and lived to age 72, a seven-year concern. They also had Social Security and possibly a company pension. Today's retirees face the daunting task of planning for 25-35 years of retirement income with lower Social Security income, diminished or non-existent company pensions and ever increasing health care costs. Add to this, the potential for a nursing home stay, inflation, taxes, higher energy costs and you can understand the importance of proper retirement income planning.
Millions of Americans are transitioning from full-time work into retirement moving from what is called the 'accumulation phase' - building wealth through savings and investments - to the 'distribution phase', drawing on those savings and investments for income they can rely on for the rest of their lives. This transition involves a major shift in financial tactics and planning to manage these high stake risks.
How long will your savings and investments need to last? The chart below shows average life span of a single person versus a couple.
Inflation Risk *
If you live 20 years in retirement, you need $129,734 to produce $1,000 per month income - No Inflation!
If you live 20 years in retirement, you need $163,007 to produce $1,000 per month income - 3% Inflation!
If you live 30 years in retirement, you need $195,343 to produce $1,000 per month income - 3% Inflation!
* Assumes (non-guaranteed) 7% investment performance and the depletion of invested funds.
Investment Risk and Taxes
Am I being too conservative or too aggressive?
The wrong mix of assets can create too much portfolio volatility and/or not enough growth to meet future income needs. If one were to invest and lose 50% of their value, they must earn 100% to have that investment back to the original value.
Are tax brackets likely to go higher? Most likely, they are with our increasing country's deficit, the on-going wars and natural disasters. Properly designed, tax-efficient withdrawal strategies can add years to an income stream.
There is a great doubt surrounding the solvency of Social Security and its long term viability. Will this program ever provide the benefits promised?
What can I do to build guaranteed income?
There are many strategies to withdraw money for retirement. Most people have no idea which account they should draw from first. Whether it be their IRAs first, real estate, stocks or their CDs etc. One approach is the "bucket" approach. This approach holds four buckets of your overall retirement assets and provides an income over periods of time from those different buckets. We have had much success with this approach.
Healthcare Expense Risks
Healthcare and Long Term Care costs can derail your retirement plan.
1. Healthcare costs may rise substantially throughout your retirement years.
2. A 65-year-old couple retiring in 2006 may need between $200K and $330K today to cover out-of-pocket medical expenses during retirement.
3. One out of every two retirees will likely spend time in a nursing home or home healthcare facility.
4. Nursing home expenses average $35K to $115K per year today. **
** Source: NFS Brochure: Retirement Income Planning: America's Lifetime Income Challenge (Brochure #: 1.833058.100)
First Step – Analysis
A comprehensive retirement cash flow analysis should be completed to determine if your current investment capital plus any other income stream (social security, pensions, etc.) will provide the income necessary to last your entire lifetime. We take into consideration thousands of potential scenario's using different rates of return, inflation rates, life expectancies, and the taxation of different pools of assets (tax-deferred, tax-exempt, taxable). We also take into account any potential nursing home or long term care costs that are unknown and unpredictable. Any legacy desires can also be included.
Once this analysis is complete, a game plan can be built to help provide retirement income throughout your retirement years.