Do You Have What You Need to Retire?
Do You Have What You Need to Retire?
A prospective client once told me, “I’m going to retire at age 60, whether I can afford it is another question.” Retirement is often thought of as an age, but confidence in being able to step away from a wage-paying job should be thought of in terms of multiples of your income.
The typical American job requires you to pay into Social Security, which has benefits that can be taken between ages 62 and 70. For median wage earners, Social Security replaces about 40% of pre-retirement income. It is common to be able to retire on 75% to 85% of one's pre-retirement income. Why? In retirement years, you are no longer saving 10% to 20% of your income into retirement plans and no longer paying FICA taxes. This means for the average worker, Social Security provides about ½ of the income needed for retirement. The remainder must come from personal savings and investments.
A financial planner will typically recommend you accumulate at least 12x your final year’s wages in retirement assets. Let’s look at Cheryl, a 66-year-old making $65,000 per year who has $780,000 (12x final wages) in her retirement account. Cheryl’s expected Social Security benefit at age 67 is $2,350 per month or $28,200 per year. Cheryl’s financial planner has her $780,000 retirement savings invested appropriately for retirement and Cheryl distributes 4% per year from her asset total, which initially equals $31,200. Cheryl’s $28,200 Social Security benefit plus $31,200 in distributions from her retirement account leaves Cheryl with retirement income of $59,400 or 91% of her pre-retirement income. Cheryl is likely to experience a comfortable retirement.
Some people in the early stages of their career prefer their financial planner to help them devise an accumulation plan that does not count on Social Security. The intention of this article is not to debate the health of our Social Security benefit system, but I would comment that any plan is stronger if it can stand on its own. If someone plans for retirement without Social Security, it is typically recommended they achieve a retirement savings total of at least 20x pre-retirement income.
If you have a pension, in addition to Social Security benefits, your asset accumulation needs may be even lower. Alternatively, if additional retirement income is needed, contractual income products such as annuities may help boost your safe retirement income level. Every retiree has individual circumstances and goals. This article is intended to provide general guidance on retirement income planning and is not intended to be individual advice for your specific situation.
Need help? Give us a call!
Disclaimer: Crosby Advisory Group, LLC is a registered investment advisor. This newsletter is for general knowledge and is not intended to be individual investment advice. Investing involves risk including potential for loss. Understand all risk and fees before investing. NMD Insurance is affiliated with Crosby Advisory Group, LLC.
