Retirement and Wealth Planning can be an extremely stressful and overwhelming task. Working for decades, while raising a family, enjoying vacations, all the while balancing a budget, is a necessity for most Americans. However, big questions, such as ”when can I retire”, “how much will I need?”, and “how aggressively should I invest?” are questions that each and every one of us requires a specialized and customized plan if we are to ever achieve our financial, and lifetime, goals without significant sacrifice.
Nonetheless, keeping in mind general rules of thumb can help individuals in every stage of life formulate their retirement plans, and have a greater understanding of what is required to meet your retirement goals.
How Much Will I Need and When Can I Retire?
Navigating questions, such as “when can I retire” or “how much will I need in retirement” are extremely important, but also some of the most difficult questions to answer. Some of the easiest to digest guidelines include:
- The 25x/4% Rule - Saving 25 times the amount you plan to need yearly in retirement. This ensures you spend less than 4% of your nest egg yearly, which, if invested correctly, and adhered to, your return on investment will outpace inflation and your withdrawals are taken.
- The 70%-80% Rule - Plan to take 70%-80% of your average income out yearly in retirement, due to decreased spending/savings requirements in retirement. However, this does require you to stick to a budget of less than 70%-80% of your “average income” calculated.
- 15% Rule/Savings by Decade - Note this only applies to those starting in their 20s. If you save 15% of your salary, yearly, from your 20s you should save 1x your salary by 30, 2x your salary by 35, 4x your salary by 45, 7x your salary by 60, and so on.
However, a good starting point in answering these general questions depends on your unique situations and goals such as:
- Whom and what will I support in Retirement? (Spouse, Child, Grandchild, Charitable Organization, college fund(s), residence, etc.)
- When do I plan to retire, and am I willing to work part-time or as a consultant?
- What additional income will I receive in retirement, and is it fixed? (Pension, Annuity, Social Security, Union Dividends, etc.)
- What, if any, support will I receive from a spouse or child myself?
These questions can help to fill the gap of how much money you will need, once estimating your approximate expenses to reach your goals, in comparison to the income expected through retirement income source(s). Although depending on others can be problematic, certain scenarios, such as living with others (children or brother/sister) as you age, can help to minimize monthly expenses for both yourself and loved ones.
The most unpredictable question, however, is “how long will I live?”. This is an important factor. The average United States citizen that turns 65 years old has a life expectancy of 81.1 years, which is consistently on the rise. However, this is only the average and 29% of 65-year-old males and 39% of 65-year-old females are expected to live to 90! With long-term care costs consistently increasing it is unwise and nearly impossible to adequately calculate based on longevity, because of it being such an unknown. Thus it is important to not only hold investments but also hold financial assets and instruments that can defend you from bankruptcy later in life.
How aggressively should I invest?
This is a very loaded question that again depends on what you will need in retirement, in addition to your anticipated date of retirement, risk tolerance, and flexibility in retirement date. As many of us know market fluctuations are cyclical, but also random, so investing around perceived economic booms and busts is not only tricky but impossible with retirement decades in advance.
However, the tried and true general rule is the younger you are the more aggressive your investments should be. This is because economic downturns, no matter how devastating, have the ability to recover the further out retirement remains. However, oftentimes the best answer to aggression is diversification. Although risky investments have the potential to never yield value, even over a long period, some investments can exceed value significantly over a long period of time.
The most difficult time to assess aggressiveness, however, is as you find yourself closer and closer to retirement. It is first important to assess as you near retirement your proximity to exceeding your retirement goal itself. Although even one strives to maximize their retirement through high return investments, it can be best to mitigate risk to ensure a delay in retirement won’t be necessary. This was a factor that led to delayed retirements, and work well beyond 65 for many seniors after the 2008 financial crisis, which could have been mitigated with a heavier portfolio of fixed assets, rather than equities, prior to the financial crisis.
At KCA Wealth Management our mission is to be there every step of the way in supporting the members of our community with the financial and educational resources they need and deserve to prosper in retirement.
Advisory Services offered through Investment Advisors, a division of ProEquities a Registered Investment Advisor. Securities offered through ProEquities a Registered Broker/Dealer, and member FINRA and SIPC. KCA Wealth Management, LLC is independent of ProEquities.