Our economy has been in pretty poor condition — no news there. Yet, most people still working and saving for retirement focus on jobs, jobs, and well, jobs. However, for those who are already retired and living on a fixed income, the focus is on how much money is coming out of their retirement account to meet their cost of living, inflation and taxes.
It used to be that investors focused solely on returns. Whether they were investing through their IRA or a 401K plan through their employer, analysis was directed towards what the return on their mutual fund was each year.
The paradigm has changed. People are now in protection mode — which is good for younger investors who will now think more conservatively, yet for our baby boomers this may have a devastating effect on their retirement planning. Boomers will need to extend their retirement age well beyond the age of 66 and/or cut their standard of living.
High levels of unplanned layoffs have left many workers seeking jobs in a market that is not only job scarce, but often unfriendly to older workers seeking large paychecks. If one was to opt for early retirement, not only would they be cutting short the number of years of productive income, but they would need to settle for a reduction in their social security income (full income from Social Security is age 66, reduced approximately 25 percent if taken at age 62). Add to today’s retirees woes the insecurity of many 401K plans — companies going bankrupt, businesses needing to abandon their retirement plans all together and wide fluctuations in the stock market — workers and retirees are often uncertain where to head to plan their retirements.
Often, the simplified version of retirement planning looks something like this:
• Predict what income you think you will need to live on in your retirement years.
• Attempt to factor in inflation.
• Develop a plan to pull out about 4 percent of your retirement money to meet your income needs.
According to an article from MoneyWatch, if you developed a plan to live on $100,000 per year with an inflation factor of 3 percent, you would need $2.5 million dollars to make this work. Yet, the return on investment is still a variable to be factored in as you plan.
Investopedia, a great online resource, provides information on three basic income distribution plans:
1. Interest only: This allows a retiree to plan their income needs based on what an investment will return.
2. Systematic withdrawal plan: This takes income from all retirement investment vehicles to fulfill the income needs of the retiree. In down markets, the investments may lose principle, producing less resources to draw from; while in strong market times, the principle may increase, offering the retiree surplus principle.
3. Spend down/grow back, the two-headed beast: The spend down/grow back concept takes retirement money and divides it into two groups: one for income and one for investment. The hope is that the investments will keep up with the income.
So what’s the point of all this? Nothing in this world is set with any certainty.
Retirement investments can come and go with the drop of hat. For today’s and future retirees to plan with any degree of comfort, be flexible, continue to have retirement accounts monitored by professionals and have a strategy for income distribution that will work well for life’s particular needs.
Live within your means and always think twice before spending money on something frivolous.
A symposium in late July/early August will include education about financial planning, health care and long-term care insurance. If you feel you don’t have enough net worth to justify meeting with a financial planner and no idea where to start, this free education will be imperative. Space for the event is limited. RSVP at www.WSHC.net.
Judson Haims is the owner of Visiting Angels Home Care in Eagle County. For more information, visit www.visitingangels.com/comtns or call 970-328-5526.