Are you wondering if you will have enough money to retire? This question is at the forefront of many investors’ minds today. Surveys show that prospective retirees often have a lump sum figure in mind, but it’s important to take a deeper dive into your planned spending to truly assess your retirement readiness.
Christine Benz, the director of personal finance and retirement planning at Morningstar, suggests starting with a few key questions to get a better sense of what your retirement income may look like.
1. Can I live on 4% of my portfolio?
The 4% rule has been a longstanding financial planning guideline. This rule suggests that retirees can withdraw 4% from their investment portfolio in the first year of retirement and adjust their withdrawals for inflation in subsequent years. While this rule is a matter of debate among experts, it can still serve as a good starting point to understand your retirement income potential.
It’s important to tally your non-portfolio assets, like Social Security or pension benefits, and see how much 4% of your portfolio can add to these income sources. This exercise can help you determine whether you have enough to retire comfortably.
2. When should I claim Social Security benefits?
Social Security benefits are a vital source of retirement income for many individuals. While concerns about the program’s future funding exist, it’s still wise to factor these benefits into your retirement planning. Waiting to claim Social Security benefits can result in higher payouts, with about an 8% increase for each year you delay past full retirement age until age 70.
Consider your claiming decision in conjunction with your spouse, if applicable, and take other personal factors into account, such as life expectancy. Coordinating your claiming strategy can maximize your benefits in the long run.
3. How will I withdraw money in retirement?
Transitioning from a regular paycheck to managing a lump sum for retirement income can be daunting. Planning how you will withdraw funds beforehand is crucial. Benz recommends a bucketing strategy to allocate funds for immediate, near-term, and long-term needs.
Having several years of portfolio withdrawals in safer assets can protect against market downturns. Consider a mix of cash, short-term bonds, and intermediate-term bonds to weather market volatility. Long-term assets can be invested more aggressively for growth, with Roth accounts serving as a tax-efficient option for retirement income and estate planning.
By asking these key questions and crafting a strategic plan for retirement income, you can feel more confident about your financial future. Stay tuned for more expert insights and tips on managing, growing, and protecting your wealth on Extreme Investor Network.