By: Mark Clary, CFP®
Whether your idea of living comfortably is visiting with children and grandchildren, exploring hobbies, or traveling and seeing the world, you’ll want to have a plan in place to generate the income you’ll need in retirement. With the right planning, you’ll find that you can worry less about affording your lifestyle and focus more on enjoying life.
Before you can figure out how much you’ll need to live comfortably in retirement, determine what being comfortable means to you. Ask yourself questions about what’s important to you:
- How long do you want to work?
- Do you want to retire early?
- Do you want to take up an expensive hobby?
- Or would you be perfectly content spending your days reading in retirement?
These questions will help you start to budget for what you’ll need once you stop working.
The age at which you retire will also impact your cost of living when you’re no longer working. For health insurance, if you plan on leaving the workforce prior to age 65 when Medicare starts, you may need to factor in higher health care costs. That includes health insurance premiums and annual deductibles.
There will also be fixed costs such as housing and basic living expenses, along with your goals for this chapter of your life. One reasonable starting point is to assume that you’ll want to replace 80%-85% of your pre-retirement income. As early as age 62, Social Security will provide a regular monthly check for as long as you live, and the amount you get each month depends on when you start using the benefits.
Next, evaluate your retirement savings. Many suggest the so-called “4 percent rule”—you withdraw 4% from the total value of your retirement savings in the first year that you retire. Then, you can continue to withdraw the same amount, adjusted each year for inflation, and have a reasonable level of assurance that your portfolio will last at least 30 years.
When you’re looking to live comfortably off your savings, it’s certainly easy to overlook the risks that could eat into your savings over time. This includes market volatility, taxes, inflation, healthcare expenses, and what type of legacy you want to leave for your family and causes close to your heart.
It’s best to prepare for your risks with a range of financial options you can incorporate into a retirement income plan such as investments for growth, the cash value of permanent life insurance for protection, and guaranteed growth and an annuity for guaranteed income.
A financial advisor can help you build a plan that uses a mix of diverse financial assets in a way that allows you to generate more reliable income with your savings while planning for risks that could impact that income. Having such a plan can help you feel more confident about your ability to generate the income you’ll need to live comfortably for the rest of your life.
Northwestern Mutual is the marketing name for The Northwestern Mutual Life Insurance Company, Milwaukee, WI (NM) (life and disability insurance, annuities) and its subsidiary Northwestern Mutual Wealth Management Company, which provides fee-based financial planning and investment advisory services.