No retirement plan can account for every possibility. After all, it’s possible you could live to be 120! Or you could win the lottery! However, even though these events are possible, they aren’t probable, and likely aren’t worth planning for. That being said, a quality financial strategy accompanied by sound investment management can help you plan for your probable financial future and risks you are likely to encounter.
To help you on your retirement planning journey, start with the considerations below.
Inflation: Inflation is a general increase in prices that reduces the purchasing power of a dollar. If inflation increases, a dollar today won’t buy a dollar’s worth of goods and services several years from now. If you want to maintain the purchasing power of your pre-retirement income, you will need to match or outpace inflation.
Consider that from 1928 to 2018, the average annualized inflation rate was 2.9% per year.[i] To get a sense of how inflation could impact your financial situation after you retire, examine Exhibit 1, which shows how the purchasing power of $10,000 erodes under a 2.9% inflation rate over 30 years.
Exhibit 1: Impact of 2.9% Annual Inflation on Purchasing Power of $10,000
Inflation example based on a hypothetical assumed inflation rate of 2.9%.
Estate Planning: After you retire, it can be useful to think about how you may want to eventually distribute your assets. This can get complicated, so it may be best to consult an estate planner to learn more about your options. However, you can get a head start by thinking about a few things:
Insurance: Is life insurance or long-term care insurance right for you? If life insurance is appropriate for your situation, you’ll have to choose from the many types available. You may consider life insurance if you need to provide financial support for a spouse, partner, or dependent in the event of your death.
Long-term care insurance can also be an important option for some individuals. Anyone could end up with a disability or health issue in the later stages of life. Long-term care costs can be significant, and Medicare and health insurance may not cover all of your future care costs. Long-term care insurance could be appropriate for some individuals, but not others. Carefully consider your personal financial needs when evaluating whether these insurance options are right for you.
Social Security: Retirees need to consider when they will begin taking Social Security benefits. You can begin to receive Social Security at age 62, but your benefits may be permanently reduced.[ii]
You could wait until you reach full retirement age to receive your full benefit amount. But if you wait even longer, your benefits could increase.[iii] The decision on when to start taking benefits will depend on your personal financial situation and income needs.
Account Types and Withdrawals: How much money do you expect to receive from all your sources of income and cash flow after you retire? In your estimate, you should include investments, pensions, retirement accounts, annuity payouts and Social Security benefits.
Some income sources, such as pensions, may pay out a specified amount each month. Other income sources, such as Individual Retirement Accounts (IRAs), can allow for more flexible withdrawals. Consider what forms of income and withdrawals you may need throughout your retirement. Additionally, be aware of any required minimum distributions. These may be applicable to some or all of your retirement accounts.
Tax Planning: Personal income taxes and capital gains taxes can have an impact on your investments and retirement income. Keep in mind that different income source or types of accounts may have different tax treatments. For example, Roth IRA withdrawals are treated differently than traditional IRA withdrawals. Retirement income taxation can be complicated—you may wish to consult with a tax adviser for your specific situation.
We have helped many investors throughout their retirement planning journey. There are many factors to consider, whether you are pre-retirement, planning to retire soon, or already a retiree. To learn more about Fisher Investments and how we can help you, no matter where you are in your retirement planning process, contact us today.
[i] Source: FactSet, as of 02/25/2019. From 12/31/1925 to 12/31/2018, average annualized inflation was 2.90%, based on the US BLS Consumer Price Index.
[ii] Source: Social Security Administration, as of 09/03/2019. https://www.ssa.gov/planners/retire/1943.html
[iii] Source: Social Security Administration, as of 09/03/2019. https://www.ssa.gov/planners/retire/delayret.html
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