When meeting with pre-retirees as well as current retirees, one of the most common areas of concern, apprehension, and (at times) outright fear, is whether they will run out of money during retirement. It is a daunting thought to contemplate having received regular paychecks for 30, 40, or more years and having them suddenly cease.
This realization of no longer being able to rely on earned income is compounded by numerous other risks an individual will face leading up to and during retirement.
Another concern for individuals is inflation, or the eroding value of their savings caused by the increasing cost of goods and services over time. If someone retires today with an annual income need of $90,000, using a 3% inflation rate, it will require $140,000 annually to support that same lifestyle in just 15 years. If you take into account the projected increases in health insurance and prescription drugs, you can begin to see the challenge of creating sufficient income to keep pace with inflation.
Given the uncertainty of world economies and the increased volatility in world stocks and bonds, market risks are near the top of the concern list. The impact of increased volatility is amplified as one approaches and then enters retirement. It is difficult enough for someone with a long-time horizon to see his or her savings decrease in market downturns, but it can be outright devastating for an individual close to or in retirement. The sustainability of his or her portfolio could be in question depending on the degree and timing of negative market returns.
Couple the aforementioned risks with unknown risks, such as premature death of a spouse, long-term care needs, and disability, and it is no wonder individuals have concerns about the prospects of their retirement years.
Taking the first step
So, what can you do to take some of the anxiety away and start to put together your retirement puzzle? The first step is to list the retirement income expenses and divide them into two categories (Figure 1).
Once you have sorted your expenses into Needs and Wants, it is time to determine where your income will be derived. This, too, should be divided into two categories (Figure 2).
The reliable income can be counted on and should support the majority of your Needs. Using our example from above, the Income Needs are $60,000 and the Reliable Income is $45,000. There is a shortfall of $15,000.
The goal is to have as much of your income needs satisfied with reliable income as possible.
This way, you are not relying on market performance and investment assets to meet your most essential retirement expenses. Since this is not always possible, any shortfall will need to be made up using income derived from investments.
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