Ten Retirement Considerations for Cash Flow
Calculating must-know numbers on the way to retirement
Retirement is a numbers game, right? The big must-know number, of course, is how much you’ll need to finance fun and comfort in your post-work life. But that figure can be a moving target.
Your best approach may be to frequently crunch a series of numbers that can keep your retirement goal up to date. Not so fun? Maybe. A bigger drag? Underfunded retirement.
Here’s some math to consider.
1. Current cost of living
Your world may look different at retirement time, but you need a starting point, and this is it. How much does it cost to sustain your current lifestyle? It’s an easy equation: current annual gross income minus any money you're stashing away for retirement.
2. How many years left to retirement?
On the surface, this sounds like the easiest number in this entire exercise. But it actually requires careful thought and may be subject to revision. If you’re married, consider the retirement target date of your partner. Do you want to retire at the same time? Do your ages allow this? There are emotional and financial considerations to this new cozy routine. Is semi-retirement a desirable step-down approach? What’s your Social Security status? You get the idea. But for the sake of planning, pick a year—even if it’s just in pencil.
3. Inflation's bite?
Inflation makes today’s dollar worth less in the future. This, admittedly, is a guess, but it’s a healthy reality check that should be part of your planning. Industry economists say you should assume a ballpark 3% to 3.5% annual rate of inflation. Of course, not everyone agrees on that range. Our Retirement Calculator includes a less-conservative 2.5% annual inflation rate, estimated by Morningstar Investment Management. The point is, you'll have to factor in some inflation erosion.
4. How much will I need annually in retirement?
Factoring your answer to numbers one through three, how much money will you need each year after you retire? For instance, aim to grow No. 1 by the rate of inflation (No. 3) for the number of years in No. 2. If you have any conservative bones in your body, use them here.
5. What retirement income are you expecting?
Add it up. Lists will vary, but for starters: Social Security? A workplace pension? An annuity? Bank accounts? Rental properties?
6. Another income question: portfolio demands
Your answer to number five probably falls short of solving number four, and your portfolio will have to make up the difference. What is that gap?
7. Portfolio size at retirement?
This is simply a ballpark for how big your portfolio might need to be at the point you’ll presumably no longer be growing it with a paycheck. Could your portfolio still grow in retirement? That’s always a possibility, but remember, it’s still subject to market downturns, too, depending on how it’s invested. So, for that “magic” number: multiply your answer to number six by 25. That ballpark implies a 4% drawdown from the balance for living expenses each year. Now, past reporting has challenged that "4% rule," and it remains a worthwhile debate for you to consider. Of course, you can also routinely take a look at the makeup of your portfolio, including interest-bearing investments, dividend-paying stocks, mutual funds, and more. But this exercise is more about a round number.
8. How much is your portfolio worth right now?
Maybe you check every day? Maybe your quarterly statement is enough? Maybe those statements go unviewed? Regardless, if you’re playing along with retirement math, it’s time to see how much that nest egg might net right now.
9. What percentage are you designating to IRAs, 401(k)s?
There’s no time like the present to ask yourself if you could be stashing more away. Are you taking full advantage of a company match? Could you slice another 1% or so from your paycheck for your retirement portfolio and not even miss it?
10. More aggressive? Less?
Market returns are about as hard to predict as guessing now what the temperature might be for your first post-retirement tee-off. Again, we're simply trying to help you get in a planning frame of mind. But it can be helpful to estimate the compounded annual rate of returns your investments will need to deliver between now and retirement to help you meet all these number goals.
Low single digits? We can almost hear your sigh of relief. Double-digit returns each year for several years? You may have some work to do.
Is your allocation and risk appropriate for your age, goals, and time left to retirement? This is where your financial professional can not only take some of this heavy-duty thinking off your hands, but can also help you form a plan to make the math less of an exercise and closer to reality.
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