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Retirement planning with your partner can be rewarding and challenging. In retirement, your every lifestyle aspiration as a couple may be centered on the income your nest egg can generate.
At the center of your retirement plan is the question, “How much income do we need to live comfortably in retirement as a couple?” You and your partner may have financial situations, goals, and needs that require a customized approach to planning retirement income. As you might suspect, a basic internet search for the average or median retirement income may not yield the information you need. These numbers don’t account for your individual factors, such as health, retirement goals and more.
In other words, the average (or median) household income in a given area may match poorly with your financial needs as a couple. And your needs will likely change over time. To help you get started, here are a few critical factors that we believe can help guide your retirement income planning.
When choosing your retirement date, you should consider your financial needs. How much money will you have when you retire, and how much income should you generate each year to sustain the retirement lifestyle you desire? How much of this income might be drawn from your retirement accounts?
To avoid having insufficient income during retirement and to help determine how much retirement savings you may need for expenses, you may try to estimate how much money you need by keeping your annual withdrawals below a certain percentage—such as 5%—of your portfolio’s value upon retirement. (However, keep in mind the dollar amount may rise due to inflation.)
If you were to try this method, you might estimate how much annual income you might require to live comfortably in retirement, then divide that income estimate by the percentage of your portfolio you plan to withdraw annually to estimate the desired size of your retirement savings. To help illustrate this example, here is a hypothetical scenario:[i]
That means to withdraw roughly $100,000 annually (not accounting for inflation) while limiting your withdrawals to about 5% of your retirement savings, you may need a total retirement portfolio of about $2 million. However, this example is simplified, so it may be best to seek the help of a retirement planner when doing your own personal estimation.
If you don’t think you have stashed away enough savings to retire comfortably. What might you do next? You or your partner might consider working for a few more years or taking on a part-time job in retirement.
Depending on your situation and where you are in the retirement planning process, you might consider the prospect of investing for long-term portfolio growth. Cutting costs and expenses is just one way to avoid depleting your retirement savings. But you may have other options to improve your retirement savings and potentially even add to your retirement income source.
How you invest your savings can affect your retirement lifestyle. If it makes sense for your situation and you decide to invest for long-term growth before and during retirement, you may be able to maintain your purchasing power and lifestyle while in retirement.
This idea may go against a common assumption — the older you get, the more “conservative” you should be with your investments. Conservative, in this case, is typically understood as investing in securities with little-to-no short-term volatility, such as bonds or cash. But this approach might not be best if you require high long-term growth. It could even harm your financial sustainability if you don’t achieve the investment growth required to maintain your current lifestyle.
For investors requiring this kind of long-term growth, we believe equities can be incredibly helpful in many cases.
How long do you expect to live? It is better to plan for a longer investment time horizon — how long you might need your money to last — than risk running out of money in retirement.
Investors commonly believe their time horizon for saving and investing ends the day they begin life as a retiree or at the end of their lives. But often, they underestimate how long they may need to plan for. Bills don’t stop on the day you retire. Unforeseen expenses can impact your retirement expenses. Inflation can continue to rise, sapping your purchasing power. New hobbies or travel could lead you to increase spending. In short, your income source may need to continue growing well after you retire so you can live comfortably in retirement.
You may begin estimating your investment time horizon based on your life expectancy or your partner’s, or some time even further out depending on your objectives. However, you can’t perfectly predict your lifespan. Referring to a standard (or average) life expectancy might be a place to start. But the average life expectancy can’t accurately reflect your specific situation. So it may be best to plan for longer than simply life expectancies — potentially much longer!
In addition to income prospects you might have such as a pension, Individual Retirement Accounts (IRAs) or other nest egg savings and investments, you may also receive Social Security benefits. Deciding when to begin taking these benefits can be tricky, especially for couples. With Social Security, you often have the ability to delay receiving benefits.
Generally, the longer you delay taking benefits past Full Retirement Age (FRA), the greater the benefits for the retiree. But as a couple in or near retirement, you may need to forego larger future Social Security benefits if you need cash flow at or before FRA.
The Social Security Administration provides helpful tools, including benefits calculators, to help estimate potential benefit amounts. You might want to consult an adviser to optimize your Social Security strategy as you approach your FRA.
Some additional benefits are available to couples, namely spousal benefits and survivor benefits.
Spousal Benefits.[ii] You may be able to collect benefits based either on your own earnings, or on 50% of your spouse’s earnings.If one spouse was a much higher earner, it might make sense for the other to collect benefits based on 50% of the higher earner’s income. But to receive this benefit, you must meet the minimum age requirements and your spouse needs to have already filed for Social Security benefits.
Survivor Benefits.[iii] This option may allow for a spouse (or other dependents) to receive up to 100% of the deceased’s benefit amount. If you are the higher earner in the household, you should consider your spouse’s age and health before deciding when to begin receiving benefits.
All of these are important considerations when determining how much income you will likely need as a retiree. Everyone’s circumstances are unique and a personalized plan can help you better plan for your own retirement. Fisher Investments has helped thousands of investors plan for retirement and beyond. To learn more about your retirement plan options, contact us today and speak with one of our qualified representatives.
[i] Note: This is a hypothetical example intended to illustrate a point and is not a personalized recommendation. Optimal retirement portfolio amounts and withdrawal rates will vary based on individual circumstances and market conditions.
[ii] Social Security Administration, as of 09/04/2018.
[iii] Social Security Administration, as of 09/04/2018.