In working with my retired or soon-to-be retired clients, perhaps the most frequent question I am asked is “What is the best way to withdraw from my investment and retirement accounts in retirement in order to provide me my desired retirement income?” I believe they ask me this question because many of them have investments in a mix of different accounts with varying tax characteristics such as taxable investment accounts, IRAs, 401k or retirement plan accounts, Roth IRAs, and possibly real estate investments such as rental property. In addition to that, they may also have retirement income coming in from multiple sources and at different times such as Social Security income, pension income, and deferred compensation. If you are interested in increasing what you can spend in retirement and reducing the impact taxes have on your retirement nest egg, it is important to have a multi-year retirement income plan that takes into account the impact taxes will have on both your retirement income sources, and the withdrawals you take from your different investment and retirement accounts.
As a financial advisor, this is a frequently asked question. How much money do I need to save to retire comfortably? In other words, what is my number?
Much has been written about this topic. Schwab recently released a survey of 1,000 401(k) participants across the country indicating that on average, Americans believe they need $1.7 million to retire. That may seem like a reasonable number, but is it? A recent CNBC poll showed that two-thirds of U.S. workers are either very or somewhat confident that they will be able to live comfortably throughout retirement. However, a study by the Employee Benefit Research Institute showed that only 42% of Americans have done any retirement calculations. And on top of that, according to Fidelity, the average 401(k) balance in the U.S. is $297,700 which is a far cry from $1.7 million.
So, where is the disconnect and how can you actually determine what your own “number” is?
Although every person’s situation is completely different, there are really five things to consider when determining how much you need to save for retirement. The impact of underestimating any of these factors could be catastrophic, so this is not the time for optimism. This is the time to be very clear-eyed about setting your goals and expectations. Let’s get started.
When planning for retirement, it’s important to consider a wide variety of factors. One of the most important is health and its associated costs. Thinking about your future health and the rising cost of health care can help you better plan for retirement in terms of both your finances and overall well-being. This quiz can help you assess your current knowledge of health and health-care costs in retirement.
Recently, I was interviewed by U.S. News & World Report for an article on phased retirements. I shared that, “Phasing into retirement can be a wonderful way to move into the next chapter of your life gracefully while still enjoying the rewards of working.” Indeed, retirement for the baby boomer generation and those younger is looking very different from the retirement of our parents. For many, retirement will be a long process of gradually winding down work hours and responsibilities rather than a firm date. There are advantages to this phased in approach and things to watch out for, too.
Each year, the Employee Benefit Research Institute (EBRI) conducts its Retirement Confidence Survey to assess both worker and retiree confidence in financial aspects of retirement. In 2018, as in years past, retirees expressed a higher level of confidence than today’s workers (perhaps because “retirement” is less of an abstract concept to those actually living it).
Now that it’s fairly common for families to have two wage earners, many husbands and wives are accumulating assets in separate employer-sponsored retirement accounts. In 2018, the maximum employee contribution to a 401(k) or 403(b) plan is $18,500 ($24,500 for those age 50 and older), and employers often match contributions up to a set percentage of salary.
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