Don’t Make This Common Retirement Planning Mistake

Don't Make This Common Retirement Planning Mistake

Many Americans worry about whether they have saved enough to have a comfortable retirement. But, surprisingly, most haven’t actually crunched the numbers to estimate how much money they will need in retirement in order to live comfortably.

According to a survey by the Employee Benefit Research Institute, just 42% of Americans have attempted to calculate how much money they might need for retirement. In other words, almost 60% haven’t estimated how income they might require.

A Gap Between Retirement Confidence and Readiness?

In the survey, just 3 in 10 people said they have tried to estimate how much they might pay in healthcare expenses during retirement. These are sobering findings, considering that many people report they are confident in knowing how much money they need to live comfortably in retirement.

Six in 10 (67%) said they were “somewhat confident” about their understanding of their income needs. As for higher levels of assurance, two in 10 (23%) said they were “very confident.”

However, as the Employee Benefit Research Institute’s other findings show, the vast majority of retirement savers haven’t actually calculated how much money they might actually need. This could set retirement savers up for a future of unnecessary stress – and even reduced lifestyles.

Will You Have the Income You Need?

In another part of the survey, retirees were asked whether they were confident that “they will have enough money to last their entire life or will be able to afford the lifestyle they are accustomed to.”

More than 3 in 4 retirees reported they were “somewhat confident” or “very confident.” Eight in 10 were confident about being able to cover health expenses, and 6 in 10 were confident about being able to cover long-term care expenses.

How Much Could Health Costs Run?

Fidelity estimates that a typical 65-year-old couple retiring in 2020 would be expected to pay $295,000 in total healthcare and medical expenses throughout their retirement. And according to Genworth, an insurer serving the long-term care market, long-term care expenses can also carry a hefty price tag.

Nationally, the average cost per month for a semi-private room in a nursing home facility was $7,513 in 2019. Meanwhile, the average cost per month nationally for a home health aide was $4,385.

Sidestepping Costly Retirement Planning Mistakes

With guidance from a financial professional, you can build a plan for how much income you will need — and how you will pay for costly health needs like medical services and long-term care.

Here are questions you can think through as steering points for your planning and when you work with your financial advisor on your income plan. They can help you ensure that you have sufficient lifetime income for your long-held goals and lifestyle plans.

Review Your Current Financial Progress

Take a look at your portfolio now. How much have you accumulated in assets and savings? How much longer will you work? At what age are you planning to retire?

How much more will you save? While it may not be ideal, working longer to delay retirement can have a few upswings.

Not only will you have more time to earn more income and therefore sock away more in much-needed savings. This also puts off the timeline of starting to take retirement withdrawals from your portfolio so you can replace the earned income you took home during your career.

In turn, that gives your money more time to grow to a larger nest egg.

See How Much Income You Might Need

If you are still unsure of your savings progress, you can determine this by “working backwards.” This involves getting a hold of what your monthly retirement income needs will be.

Your current monthly cash-flow and spending will be valuable clue-ins of what your future lifestyle may look like and what it may cost. Use your current income and household expenditures as guides for what your expected future lifestyle will be.

Of course, certain parts of your financial picture will change. Some costs will go away. For example, spending tied to raising children will go down as your kids move out of the house and start building lives of their own.

Then some expenses will go up. An almost-absolute financial certainty for this is healthcare costs, which tend to increase as health changes with aging.

Your financial professional can help you nail down what expenses you should be planning for. For effective planning, it’s prudent to use at least a 30-year timeline in your retirement income projections.

If you can run projections using multiple scenarios, you will be even more prepared. Your advisor can help you with these tasks.

Determine How Much Income You Will ‘Earn’ in Retirement

Next, figure out how much you will earn. Yes, this is quite a bit different from the take-home pay you received during your career. But the IRS and quite a few state tax-collecting authorities treat distributions from retirement accounts as earned income, meaning your withdrawals will trigger some tax bill.

Social Security benefits are likely to play some role in your retirement income plan. How much you receive in monthly payouts will depend on when you take your benefits. While claiming at your full retirement age will entitle you to your full monthly benefit, waiting until age 70 can boost your overall benefit by roughly another 32%.

What if you find that you have savings shortfalls to cover and you intend to pursue some form of work as a source of income? Then you will want to calculate the tax effects, if any, on your benefit payouts and how your earned income will affect your tax bill in general.

Lock Down Your Income Sources

Determine where will the money come from. Your current source of income, whether it’s from career employment, entrepreneurship, or perhaps even a mix of both, isn’t likely to continue as your primary source in retirement.

Once you call it quits and leave the workforce, the assets and savings you accumulated over many years will power your income streams. These sources of income come with different tax implications.

Your pre-tax dollars, or so called “qualified” money inside a traditional IRA as well as 401(k), will be taxed at ordinary income rates when they are withdrawn.

Liquidating shares in an investment portfolio that you funded with after-tax dollars, or “non-qualified” money, will trigger a capital gains tax bill.

Your advisor can help you with planning how you will receive income from these sources and how to make your withdrawals as tax-efficient as possible. Ask your advisor whether you need to be contributing to a Roth IRA instead of a traditional IRA in order to accumulate some tax-free income.

If you have some money built up in your employer retirement plan or a traditional IRA, you may ask your financial professional about Roth account conversions. That needs to make sense numbers-wise for your situation, but a Roth conversion can potentially lower the lifetime taxes you pay in retirement.

The bottom-line of all of this? It’s essential to get a sense of how much money you will need for a comfortable retirement.

Putting a Plan Together

So, start building a plan to catch up on savings if you have to. A rock-solid plan will put you in the driver’s seat to deploy your money wisely and let you make the most of it for a comfortable retirement.

You might not feel comfortable crunching all of these numbers yourself (especially because they involve several time-value-of-money calculations). That is more than okay.

No sweat, an experienced financial professional can help you walk through all of this. Their knowledge and experience from helping others like you create personal financial strategies and navigate the “what ifs” of retirement can make a big difference for your peace of mind.

Depending on their focus, your financial professional may also give you an update on your progress using sophisticated planning software. This can give you a fairly clear picture of how you will fare in retirement given your current circumstances.

Avoid Retirement Planning Mistakes by Planning Today

No matter what, a conversation with your advisor will make clear what changes you need to make in order to get to where you need to be. Whether you should increase your contributions to retirement accounts or cut back spending in certain areas, they can help you determine precise steps for reaching your goals with confidence — now and in the years ahead.

Consult with your financial advisor today for more information on how you can ensure that you will have a comfortable retirement. What if you are looking for a financial professional to guide you?

No sweat. Many experienced, independent financial professionals are available at to serve you in your unique situation. Use our “Find a Financial Professional” section to connect with someone directly. Should you need a personal referral, call us at 877.476.9723.

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