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MoneySmart: How Much Do You Need to Retire?

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It’s never too early to begin planning.

MoneySmart
Grace S. Yung

The ideal retirement may look different for each person, but it typically has a common thread: the desire for ample income to cover living expenses, as well as travel, entertainment, and unexpected costs.

It’s possible that you have seen advertisements that refer to reaching your retirement “number.” But the reality is, there is no specific amount that is right for everyone. 

In retirement, your income matters more than your net worth. Your assets need to produce a consistent income stream to meet your living expenses.

In the past, many retirees relied on the “three-legged stool” of income sources: a defined-benefit pension, Social Security, and personal savings/investments. 

However, many employers have replaced defined-benefit pension plans with defined-contribution plans. The most popular of these is the 401(k). Even though your money grows tax-deferred in a 401(k), it is up to you—rather than your employer—to make sure you have enough income down the road.

If you have accumulated enough “credits,” you can collect Social Security as early as age 62. But Social Security was never meant to fully fund a person’s retirement. On average, these benefits replace roughly 40 percent of a worker’s pre-retirement earnings. 

As a result of these factors, more retirees are relying heavily on the third leg of the retirement-income stool: personal savings and investments. This requires you to strike a balance between how much you take out and how much stays invested so it can continue to grow each year.

In the past, a “safe” withdrawal rate was considered 4 percent. Now, due to both market volatility and historically low interest rates, it can be difficult to determine what rate of withdrawal is “safe.”  

Additionally, while having a reliable income in retirement is important, it is actually only half the battle. Several other factors can also impact whether you will be able to continue purchasing the goods and services you need. They include inflation, order of returns, emergency expenses, and longevity. 

Over the last 100 years, the inflation rate has averaged just over 3 percent per year. Inflation can make a big difference in how much you will be able to purchase with the same amount of income down the road. As an example, using an inflation rate of just 3.22 percent, your income would need to double in order to purchase the same items in 20 years. 

When it comes to the order of returns, your average return can be overshadowed by when those positive and negative returns are attained. For example, if two investors started out with $100,000 each in their portfolios, they could have drastically different outcomes—even with the same “average” return over time.

Throughout your life, there have probably been times when you needed to either dip into your savings or emergency fund, or worse, put unanticipated expenses on credit. During your working years, it can be easier to pay off these emergency expenses. But when you retire and are living on a set income, unexpected financial needs can be much more difficult to overcome if you don’t have a plan in place.

And believe it or not, while living a nice long life certainly sounds appealing, longevity can be one of the biggest financial hardships you can face in retirement. This is because all of those extra years will subject you to all of the other risks for a longer period of time.

If you don’t yet have a retirement-income plan in place, it’s never too early to begin planning. Waiting too long to plan can result in some unexpected—and usually undesirable—results. Working with a financial professional who is not only well-versed in creating retirement plans, but also highly knowledgeable in issues that affect the LGBTQ community, can better assure you that your specific needs, as well as those of your spouse or partner, will be considered. 

This article appears in the June 2018 edition of OutSmart magazine.

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Grace S. Yung

Grace S. Yung, CFP, is a certified financial planner practitioner with experience in helping domestic partners plan their finances since 1994. She is a principal at Midtown Financial LLC in Houston and was recognized as a “Five-Star Wealth Manager” in the September 2017 issue of Texas Monthly.
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