Planning for Retirement

December 2013
Written By: 
Lori Cullen

Sufficient savings is only part of the equation. A smart retirement plan calls for patience.

There’s one query Terry Jandreau, CFP, hears from almost every client, and it usually starts off like this: “I just want you to look at my numbers and look at my assets and let me know if I can retire today.”

So the first vice president and branch manager at Wells Fargo Advisors, LLC, goes through the exercise. He says it’s rare that he would tell clients they can’t retire today. More often, he tells them that to do it right now isn’t in their best interest.

“After people have been working for so many years, they get fed up,” says Jandreau. “They look at things and say, ‘If I cut back here, and I pull all of my income together, I can just about cover my basics.’”

Many people focus on the magic number needed to retire. Just because you can scrounge together enough to retire today doesn’t mean you should or that your savings will last. Sufficient savings is only one of several key elements of a smart retirement plan.

One of the most important retirement planning tasks is creating an income strategy. Even if you amass a fortune, in order to make it last, you’ll likely live off interest rather than tapping into the actual funds.

In the best scenario, says Jandreau, workers enter retirement with several sources of retirement income.

Fixed costs like food, clothing and shelter should come from guaranteed sources, like Social Security, corporate pension plans and annuities.

Remaining costs such as entertainment and travel are variable lifestyle expenses and should be financed from money accumulated in personal savings and investments, including savings accounts, mutual funds and IRAs, for example.

“It’s very, very specific,” says Jandreau, who stresses that whether your retirement will consist of gardening, home dining and neighborhood walks with the dog or touring the world’s top 100 golf courses depends not only on the amount of money you sock away, but also on how you manage it thereafter.

According to “Key Findings and Issues: Longevity,” a 2011 report conducted by the Society of Actuaries, most Americans underestimate longevity and fail to understand the potential consequences of living beyond their own planned life expectancy.

By age 65, U.S. males in average health have a 40 percent chance of living to 85 while females have a 53 percent chance, more if you’re healthier. Therefore, financial planning experts suggest preparing for 25 to 30 years in retirement to lessen the chance of running out of money.

A second risk is inflation, which can corrode the purchasing power of your savings.  

The Bureau of Labor Statistics’ Consumer Price Index inflation calculator shows a person who retired in 1992 with an income of $50,000 would need almost $82,437 to maintain the same lifestyle today.

Because of inflation, Social Security automatically factors in a cost-of-living adjustment; some pension plans do, too. However, these automatic increases may not be enough.

“There has to be a hedge against inflation and a continual income stream,” says Bill Losey, CFP, owner of Bill Losey Retirement Solutions.

The author of Retire in a Weekend and former resident retirement expert on CNBC’s On the Money television program advises clients to allocate a minimum of 30 to 40 percent of a retirement portfolio to stocks and stock mutual funds from larger, good-quality U.S. and international companies that have a long-term history of not only paying dividends but also raising them annually at a rate that outpaces inflation.

Once you are all set with your smart retirement plan, all that’s left is to wait for your 62nd birthday to roll around so you can quit work, file for Social Security and hit the green, right? Not so fast.

Charles Jeszeck, director of education, workforce and income security at the U.S. Government Accountability Office in Washington, D.C., recommends that individuals delay receipt of Social Security benefits until reaching at least full retirement age and, in some cases, continue to work and save, if possible.

“Claiming Social Security benefits early may jeopardize your economic security because early claimants receive permanently reduced benefits,” he says.

If you can afford to wait even longer, do, says Jeszeck, as the monthly Social Security benefit rises by about 8 percent each year until age 70.

“One of the big mistakes I see people make in their 50s or 60s is that they retire or take an early incentive offer because they think they’re ready to stop working, but what they really wanted was a break,” Losey says. He suggests they decrease the number of days or hours they work.

But in Losey’s opinion, the ultimate in retirement planning is never to retire. “When I meet with clients, I redefine retirement as making work optional. If you find a career that you love or a calling that gets you excited to get out of bed in the morning that generates cash flow, why would you give that up at age 60 or 65?”