Is $1 million enough for retirement? Harbor Crest Wealth Advisors gets this question a lot from couples. They’ve saved diligently their entire lives and want to know if those annual contributions have amounted to enough to not only survive, but thrive, in retirement.
You’ve earned the right to enjoy the finer things in life during your retirement. But retirement can be an expensive endeavor — from taxes, to travel, to home repair, to healthcare.
If you can answer the following four questions, you are well on your way to defining what you need for a successful retirement.
1. How Much Will I Need in Retirement?
As your first step, you should build a comprehensive retirement income plan. This plan will incorporate all aspects of your financial life, from your investment accounts to your insurance. This may seem like a herculean task, but a financial advisor can help you understand how to best organize and plan for your financial future.
If you want to take a stab yourself, your most immediate task is to determine your monthly and annual expenses. How much are you currently spending? Now comes the more difficult part. Can you categorize your expenses into core and discretionary expenses? This is a critical thing to know in order to plan for your minimum income needs during the first few years of your retirement.
One of the most difficult questions to answer as you plan your retirement is just how long you may need income. We can’t predict to the penny how many years you need to plan for, but we can make more educated guesses than assuming a basic 25- or 30-year horizon. We like to run a variety of scenarios to show just how resilient your portfolio is to different ages and income needs.
2. How Will I Fund My Retirement Goals?
There are three basic ways to create the income you need in retirement. The devil is in the details, however, as to how to best optimize the what, when, and where of building your retirement income.
Retirement and Investment Accounts
Retirees have had to carry the burden of securing their income in retirement since the shift away from defined benefit plans in the workforce. You’ve hopefully built up a dedicated investment portfolio for retirement through 401(k) plans, IRAs, and brokerage accounts. These will be the primary sources for your retirement income needs, but proper investment and tax questions need to be answered before taking any withdrawals.
Social Security and Guaranteed Income
Sources of guaranteed income, like Social Security or annuities, can also play a vital role in your retirement income planning. In fact, there are several different Social Security filing strategies in order to maximize your lifetime value when used in tandem with your existing investment portfolio. These, of course, need to be individualized to your specific income and health considerations. Further, the specifics and fees of each annuity contract require careful vetting.
Passive income is a great way to supplement your core retirement income sources, like your investment accounts and Social Security. This can be done in a myriad of ways, including rental real estate, part-time consulting, or building a digital/social media presence.
3. What Are Unanticipated Expenses in Retirement?
Understanding your retirement income needs should encompass more than just your normal, everyday living expenses. There are many unanticipated expenses that may crop up in retirement, some of which are highly variable and can be quite costly.
One of the largest, and most annoying, expenses to contend with are federal and state income taxes. You may think your portfolio is worth $1 million or more, but it’s easy to forget that those dollars are tax-deferred dollars, and Uncle Sam will want his cut when you start taking distributions. There are several strategies to make sure you can minimize your lifetime tax bill. Let’s pay Uncle Sam what he is due, but let’s not tip him.
Healthcare costs in retirement — even with Medicare — are considerable. According to Fidelity, a 65-year old couple retiring in 2019 can expect to spend $285,000 in healthcare and medical expenses throughout retirement. It’s important to note that Fidelity’s figure does not consider certain high-cost items, such as long-term care. These expenses, unless insured, can be sudden, unexpected, and often are very large outlays.
A 2018 AARP survey showed that one-third of adult homeowners expect to undertake significant updates to their home in order to live there through retirement. This practice, known as aging in place, can bring considerable costs for projects such as updating a first-floor bedroom and widening doorways.
4. What Else Should I Do Before I Retire?
Retirement planning involves so much more than simply building reliable income sources. What do you want your personal and professional legacy to be? Do you have a comprehensive estate plan (and not just a will)? If you would like to leave an inheritance to heirs, have you titled your assets in the best way possible? These questions should be answered with your financial, tax, and legal advisors in order to build the best estate and legacy plan for you.
How will you address your healthcare needs? As you plan your transition to retirement, be mindful of your healthcare coverage and costs. For those retiring prior to age 65, you will need to bridge the gap between your employer plan and Medicare. Medicare Part A and Part B covers expenses such as hospital stays, care at a skilled nursing facility, doctor visits and services, physical therapy, and lab tests. Additionally, it comes as an unwelcome surprise to many that dental coverage is not provided in Medicare.
Finally, and this part is often overlooked, but what do you want to gain from your retirement? We recommend trying to answer these two questions:
- How do you want to spend your retirement?
- Who do you want to spend retirement with?
Finding purpose and meaning each day in retirement is crucial to your mental and physical wellness. Tee times and travel can remain integral hobbies, but they shouldn’t define your daily life in retirement.
Retirement Planning with Harbor Crest Wealth Advisors
Retirement is life’s greatest transition. You get to plan for decades of time to pursue your passions and hobbies, rekindle relationships, and enjoy the little things in life with those important to you.
Make sure you can make the most of your time in retirement by preparing for it now. If you would like to learn more about retirement planning, sign up for our newsletter.