As
discussed in our previous blog post, When It Comes to Retirement
Planning, One Size Does Not Fit All Part 1: The Safe Withdrawal Rate, individuals facing retirement are
now being involuntarily thrown into the role of retirement planner due to the
gradual extinction of defined benefit pensions.
Without the proper education and training, these individuals have to
trust broad, general assumptions regarding retirement planning; which, needless
to say, presents several problems.
In part 1
of this blog, we discussed one assumption of retirement planning – the safe
withdrawal rate. While research suggests
that 4% is regarded as the safe withdrawal rate, these studies are not
solidified with 100% confidence and should not be applied to every individual. For more information on the safe withdrawal rate,
refer to part 1 of this post.
What Percentage Of My Working
Income Will I Need?
Another issue those
approaching retirement face is trying to determine how much income they will
need in retirement, often stated as a percentage of their working income. This
is a critical determination as to underestimate your retirement income need
could put tremendous strain on your retirement assets and result in either an
income shortage or a depletion of assets. Again, there is no shortage of
research available that generally concludes that between 70-90% of working
income is sufficient in retirement. While this may be fine for many retirees,
it is not based on individual factors. Without examining specific
circumstances, this may lead many to make incorrect assumptions about when to
retire and how much income is needed.
For those whose retirement is
still far in the future, this may be a fine assumption to provide a general
gauge on your retirement preparedness. However, for those whose retirement is
approaching within the next 5-10 years, a more in-depth analysis of your income
need is a must. If you believe you can survive retirement on less income than
while you are working, why? Will the mortgage or other debt obligations be paid
off? Do you have expenses associated with work, for example commuting costs,
that will decrease or disappear entirely? Will your taxes change and possibly
be lower? (This last question is important. Many assume they will be in a lower
tax bracket when retired, but that is not always the case.)
At the same time, are you
taking into consideration other expenses that may actually increase when
retired? Will you travel more? Will you eat out more? Do you have more time for
hobbies that might involve purchases or costs? Will you spend more time (and
money) with family and friends? Even more, are there expenses that were covered
while employed that will now need to be paid for out of your income, for
example health insurance and life insurance?
Without considering these,
and many other questions, accepting the general guideline that you will be fine
with 70-90% of working income is a risky proposition. Again, we are not
challenging the overall premise of these concepts – they provide an excellent
starting point for the retirement discussion. However, they should not be
expected to provide a high level of confidence and are not intended to be
applicable to everyone. Instead, we believe everyone should have a
comprehensive retirement plan that is designed specifically for them based on
their personal resources, goals and objectives.
The Necessity for an Individualized
Retirement Plan
At Kemp
Harvest Financial Group recommend that everyone have an individualized
retirement plan that is designed around their specific circumstances and goals.
More importantly, we believe this plan should provide a degree of certainty
through the plan design itself, not in general concepts or rules of thumb. When
it comes to retirement planning, one size does not fit all.
For more
topics like this, check out our radio show “Retirement Plain and Simple” every
Saturday morning at 8 on WNPV 1440 AM and like us on Facebook!
If we at Kemp
Harvest Financial Group
can help you in any way with regard to your financial planning needs, please
feel free to contact us.
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Author: Todd Little, CFP®, AIF®
Todd Little is a financial planner
with Kemp Harvest Financial. Todd is a
CERTIFIED FINANCIAL PLANNER™ professional and has a Bachelor of
Science degree in Economics from Pennsylvania State University. Todd is a member of the Financial Planning
Association and holds FINRA Series 6, 7 and 63 licenses. In addition to meeting regularly with
clients, Todd works very closely with Mark Kemp and our client service staff to
create individual retirement income plans and help our clients navigate the
retirement process.