By Andrew J. Tapparo, MSF, RICP®
Retirement only has two possible outcomes.
The first outcome is that your money outlives you. In this outcome, you will enjoy retirement with independence and dignity. Your portfolio will continue to grow even as your withdrawals increase to keep pace with living costs. You’ll also be able to leave a legacy for your loved ones or fulfill your philanthropic wishes.
The second outcome is that you outlive your money. This could mean a gradual decline in your independence where you will need to rely on other sources of income to survive. Will there be a legacy left for your loved ones?
Which outcome do you desire?
In order for your money to outlive you, a comprehensive and robust retirement plan is a must.
Let’s look at 11 ways to achieve the retirement you deserve.
1. What’s Your Ideal Retirement Date?
Your age (now and in retirement) is one of the most significant factors to consider when determining how much money you need to save. If you want to retire early, you’ll have fewer years to save for a longer retirement. And if you start claiming Social Security benefits before full retirement age, you’ll also have to factor in a smaller monthly benefit amount.
The state of the stock market can also play a role in how much money you need and how long your money lasts. A Vanguard study found that you have a 31% higher chance of running out of money if you retire near or during a bear market. Of course, you have no way of knowing if we’ll be in a bear or bull market when you retire—but this is a scenario you must account for in your retirement planning.
2. What Do You Want Your Retirement Life to Look Like?
Have you thought about the type of lifestyle you want to have in retirement? If you know you want to travel, play golf, or spend time with your grandkids, you need to factor in what that looks like and how much it will cost.
For example, if you plan to travel, you’ll need to consider:
- Will you be traveling stateside or internationally?
- How often do you want to travel?
- How would you like to get there? (e.g., car, plane, or RV)
- Where would you like to stay? (e.g., 5-star hotel, Airbnb, with family members)
- Will you be traveling with your family? Would you like to cover their expenses too?
- Will you maintain your primary residence? If so, who will watch your house and maintain it while you’re gone?
Even if your dream is simply to spend time with your grandkids, you’ll still need to think through your expectations and expenses. To some people, “spending time with grandkids” means babysitting a few times a week. To others, it means footing the bill for all-expenses-paid trips to various destinations of their choosing. Whatever it is you want to do with your time, map out the details so you can have a clear picture of how much you’ll need to make it a reality.
3. What Are Your Sources of Retirement Income?
Most clients will have several sources of retirement income including Social Security payments, employer-sponsored retirement accounts, annuities, and distributions from personal investment portfolios. Some clients will even continue to bring in a paycheck by working after they’ve officially retired.
Regardless of whether you work or fully retire, it’s crucial to evaluate all sources of income and assess your likely expenses to create a pro forma income and expense statement. Understanding roughly what you expect to bring in versus how much it will take to live the lifestyle you prefer is the first step in building a unique retirement plan. You’ll be able to determine how much, if any, you will need to withdraw from portfolio assets to meet your expenses.
4. How Much Debt Do You Carry?
Even as a highly compensated employee, you may find yourself bringing debt into retirement. This can have two major drawbacks:
- It reduces the amount of cash flow you have for housing, travel, hobbies, and other non-essential purchases.
- It can potentially drain your retirement savings quicker, which means you may run out of money or have to adjust your lifestyle down the road.
If you carry debt, take a close look at what you owe and figure out how much cash flow you’ll need in retirement to cover these expenses. Some people prefer to pay off any high-interest consumer debt before they retire. Others will take it one step further by paying down their mortgage and auto loans too.
5. What Kind of Healthcare Coverage Do You Expect to Have?
Right now, you most likely have health insurance through your employer. When you stop working, you’ll need to obtain healthcare coverage another way. You may be able to hop on your spouse’s plan, if he or she is still working. Or you can get coverage through the healthcare marketplace. You qualify for Medicare starting at age 65, but even then, you may want additional coverage to pay for prescription drugs, dental care, eye exams, and other expenses.
Retirees sometimes fail to fully plan for expenses during the later stages of retirement, and medical care often tops the list. It’s estimated that retirees will use 15% of their income for health expenses, and the average retired couple could see healthcare expenses of approximately $300,000 after age 65. Don’t let this be a planning oversight that prevents you from retiring comfortably!
6. What Impact Will Rising Costs and Taxes Have on Your Retirement?
Not only do you need to plan for basic healthcare expenses, but you must also factor in the impact of rising costs. We have seen historically high levels of inflation over the past year, which has driven the cost of everything up significantly. Though this level of inflation will not last forever, even a more conservative 3.8% increase each year can drastically affect the longevity of your retirement income.
Not only that, but healthcare costs tend to rise faster than inflation and they can become a huge burden later in life if you’re not taking proactive steps to save today.
Retirees should also consider the impact of taxes as they plan for future retirement withdrawals. Because different financial accounts are taxed at different rates, it’s important to structure your retirement withdrawals in a tax-efficient way.
Traditional IRAs and 401(k)s are taxed at the ordinary income tax rate when you withdraw. Roth IRAs and Roth 401(k)s are taxed beforehand, so the money is withdrawn tax-free. Funds in a taxable investment account are taxed at the capital gains tax rate, which is different from your ordinary income tax rate.
By understanding the tax characteristics of your retirement income, you can plan ahead and avoid a hefty tax bill.
7. Will You Have Any Dependents?
Your kids may be grown and out of the house by the time you retire, but that doesn’t necessarily mean you’ll stop supporting them financially. Over 79% of parents said they still give financial support to their adult children (ages 18 to 34), according to a Merrill Lynch study, and the COVID-19 pandemic caused a boomerang effect, with 67% of adult children still living at home with their parents after returning home in need of financial help.
8. What Type of Legacy Do You Want to Leave Behind?
Even if you aren’t helping your kids out with daily expenses, you may want to contribute to their weddings, home purchases, or leave a lasting legacy down the road. As difficult as it may be, it’s important to think about the type of inheritance you want to leave behind as you plan for retirement. Not only will this determine the amount you must save, but it will also affect your estate plan and should be factored in accordingly.
If you plan to leave tangible assets like real estate to your kids, be sure the assets are structured properly to avoid probate. Similarly, if you have substantial financial assets that near the estate tax exclusion of $12.06 million per person, you should consider trusts and other estate-planning techniques to reduce your tax liability and ensure your legacy goals are accomplished according to your wishes.
9. Where Will You Live?
Housing may be your biggest expense in retirement. And even if your home is paid off, you might want to consider downsizing to a smaller place that requires less maintenance and has cheaper utility costs.
To save even more, you can think about relocating to an area that has an overall lower cost of living. For example, the cost of living in Orlando, FL, is only 3.3% higher than the national U.S. average, whereas the cost of living in Los Angeles, CA, is 76.2% higher than the U.S. average. As you can see, where you live can make a huge impact on the overall cost of retirement.
10. What Is Your Family’s Health History?
The average 65-year-old man has a 35% chance of living until age 90; that rate goes up to 46% for a woman the same age. And while life expectancy is unpredictable, if your family has a strong history of living to age 90 and beyond, your chances may be even greater than these odds. In this case, you’ll need to determine if your planned retirement savings will last long enough.
Similarly, if you have known health conditions and/or a family history of health problems that could affect your life span, you’ll want to consider this too.
11. Is Your Portfolio Set Up for Rebalancing?
We’ve all heard about the importance of diversification when it comes to maximizing our investments. But as you get closer to retirement, it’s even more important to make sure you are investing in the right types of holdings. As you prepare to switch from accumulation mode to decumulation mode, it is imperative to ensure that you have the right asset allocation. In this way, you can minimize the impact that any one losing investment can have on your portfolio’s overall sustainability.
Rebalancing is also a key factor in keeping your portfolio safe. It’s not enough to create proper diversification and just walk away. You need to regularly analyze your portfolio to ensure that it lines up with your risk level and that you haven’t become too reliant on any one asset category.
Your Unique Retirement Needs a Unique Plan
You’ve worked hard throughout your life and career, and now you want to translate that success into a comfortable and rewarding post-work lifestyle in retirement. And you don’t want to worry that you’ll outlive your money and won’t be able to leave behind a legacy. If you want to discuss how we can help you feel confident in your retirement plan, schedule a “Get Acquainted Call” to see if we are a good fit for each other, call 978-887-1121, or email email@example.com.
Andrew Tapparo is a fee-only financial advisor at Tapparo Capital Management, a financial planning firm in Topsfield, MA, helping clients turn their savings into a retirement income that lasts. Inspired by the quote “Choose a job you love, and you will never work a day in your life,” Andy founded Tapparo Capital Management in 1997 with a passion for helping clients enjoy a truly worry-free and fulfilling retirement and experience financial freedom. As a Retirement Income Certified Professional (RICP®), he designs retirement strategies along with sound money management to help clients retire with confidence.
Andy holds a Bachelor of Science in Industrial Engineering from Rochester Institute of Technology in Rochester, New York, and a Master of Science in Finance from Bentley University in Waltham, Massachusetts. Specializing in retirement income planning, Andy completed a comprehensive financial industry education program at The American College of Financial Services and was awarded the Retirement Income Certified Professional® designation. He is frequently quoted in the media as a financial expert.
Andy and his wife, Susan, live in Topsfield, Massachusetts, and have two beautiful daughters. Outside of work, he is an automobile enthusiast, enjoys taking road trips, and loves the Outer Banks of North Carolina. In his spare time, he volunteers with the local high school varsity girl’s basketball team as the team statistician and runs the team’s website. He is passionate about supporting charities that serve our veterans and their families. To learn more about Andy, connect with him on LinkedIn.