As an experienced financial advisor, I spend a good amount of time talking to people about their retirement plans. Many questions are similar and most depend on your personal financial situation. There is no magic number or formula, but a good financial plan should answer most, if not all, of your specific retirement planning questions.
Four of the more common questions that we field as financial advisors are:
When Should I start planning for retirement? NOW
It is never too early or too late to start thinking about your retirement. The power of compounding can be amazing if you start early. Someone in their twenties might only need to save $500 a month to retire at 65 with $1,000,000. Conversely, it is never too late to start planning for your retirement, even if you have taken all the right steps and are currently in retirement, it is always a good idea to review your plan, investments, and cash flow to ensure that your investments are aligned with your plan. As you approach retirement, it is increasingly important that you begin to align your investments with your future cash flow needs.
How much money do I need to retire? IT DEPENDS
How much you need in retirement depends on lifestyle, social security, pension, sources of income, types of investments, and your overall asset allocation, as well as your appetite for risk. Generally, you are going to want to replace about 70% of your pre-retirement income through Social Security, retirement savings, and other investments.
You have taken the time and made the sacrifices required to save for retirement. Now it is time to take the time and plan for the best use of your retirement investments. Which sources of income do you tap into first, and what are the tax ramifications? Do I take Social Security now or do I wait? Do I take a lump sum from my pension or annuitize it? When it comes to retirement cash flow planning there are usually a lot of decisions that need to be made in a relatively short period of time. A financial plan can help look at the entire puzzle and how all the pieces work together to make the most of your retirement income.
I am retiring in a few years, should I be reducing Portfolio risk? MAYBE NOT
If you are 60 years old and planning on retiring at 65, you still need to plan for a 25+ year retirement. All too often we see folks approaching retirement moving the needle a little too far in the direction of ultra-conservative asset allocation. Remember, retirement cash flow planning occurs over a long-term horizon, even if you are just a few years away from retirement, and you will need to plan and invest accordingly.
How do I determine the right mix of Asset for my retirement? CAREFULLY
The key word here is for “my” retirement. All too often we see advisor’s knee jerk reactions that a 60% equity/40% fixed income portfolio is the right asset allocation for retirement. You will need to consider your own, personal situation to determine an appropriate asset mix. Determining the right asset mix requires understanding both your personal appetite for risk and your ability to assume investment risk. Once you have determined that side of the equation, apply that understanding to your time horizon and retirement cash flow requirements. It is not a one size fits all formula.
Risk appetite is personal. Think about how you reacted to past market downturns. Did it keep you up at night or were you confident that the markets would come back (as they have in the past)? Financial advisors also have questionnaires or ask a series of “What if” questions that can help you quantify your appetite for investment risk.
Your ability to take on risk is more mathematical. Questions like: What is the minimum amount of investment risk I need to achieve my retirement cash flow goals? How can I ensure I have adequate cash flow in the event of a market downturn without have to sell my investments? Where is the cash flow coming from in my portfolio? What is the probability that I outlive my investment? Generally, answering these types of questions requires a little more sophisticated statistical modeling.
If you need help answering these or any other questions about your specific situation, it might be a good idea to sit down with a Fee Only Fiduciary Financial Advisor, like Winthrop Partners, to help walk you through your personalized retirement plan.