Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
Planning for retirement is a journey that requires careful consideration and strategic decision-making. As your client prepares to retire, one of the first questions to ask is, "How much income do you need to retire comfortably?" This question is critical in setting the foundation for their retirement planning. Having a comprehensive retirement income plan that is regularly updated, accommodates changes in spending needs, inflation, market fluctuations and taxes is crucial for peace of mind in retirement.
When determining their retirement-income needs, understand that clients don't necessarily need to replace 100% of their pre-retirement income. According to the most recent report by the Bureau of Labor Statistics, on average, people ages 65 and older spent $57,818 in 2022 – about $15,000 less than the $72,967 spending average of the general population. This suggests that one year of retirement spending amounts to 80% of annual pre-retirement income.
Several factors can reduce post-retirement expenses, such as no longer needing to save for retirement, lower commuting costs, paying off a mortgage and the need for life insurance if the client no longer has dependents. Based on these factors, aiming for about 80% of pre-retirement income as mentioned above is a common goal. But this percentage can vary based on their retirement lifestyle and anticipated expenses.
For example, if the client plans to travel frequently or maintain a high-cost lifestyle in retirement, aim for 90% to 100% of their pre-retirement income. Conversely, if they plan to downsize their living situation or have already paid off their mortgage, they may be able to live comfortably on less than 80%. To illustrate, let's consider a hypothetical scenario: A couple currently has a combined annual income of $120,000. Based on the 80% principle, they can expect to need about $96,000 in annual income after retirement, which equates to $8,000 per month.
Organizing a client's finances is another major step in preparing for retirement. Financial insecurity is a common concern among retirees, often stemming from inadequate savings or unexpected expenses. By organizing their finances well in advance, this better prepares them for the financial decisions they'll need to make including understanding cash flow needs, developing a strategic draw-down strategy and having a clear understanding of their spending patterns.
There are also several outside factors that impact retirement income including inflation, market fluctuations and taxes. These are out of your control and need to be included in any successful retirement plan. Many retirees fail to account for inflation when planning for retirement, assuming their spending needs will remain constant over time. However, inflation can erode the purchasing power of retirement savings, making it essential to consider long-term investments that can keep pace with or exceed inflation rates. Market fluctuations can also pose challenges for retirees, particularly if they occur early in retirement when they're more reliant on their savings. Their retirement portfolio should be structured to support short-term, medium-term, and long-term needs and goals to mitigate the impact of market downturns. In regard to taxes, we would recommend that you develop a tax-efficient withdrawal strategy with your client taking into account their specific income and asset mix to minimize the impact of taxes on retirement savings.
Finally, consider where your client's retirement income will come from. Whether it's from Social Security, pensions, annuities, or investments, developing a comprehensive retirement income strategy can help ensure that they have enough income to support their retirement lifestyle. Retiring comfortably requires careful planning, financial organization, and a proactive approach to addressing potential challenges. By starting early, setting realistic goals, and seeking the advice of an experienced financial advisor, together with your client, you can create a retirement plan that provides financial security and peace of mind.
Colleen Kelleher Sorrentino, CFA is with Kelleher Investment Advisors, a New York-based investment advisor. Stacey Mankoff is with The Mankoff Company LLC, a New York-based marketing firm serving the financial industry.
A message from Advisor Perspectives and VettaFi: To learn more about this and other topics, check out our podcasts.
Read more articles by Colleen Kelleher Sorrentino, Stacey Mankoff
Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
