Retirement | Chill Maadi

If you’re like most people, the recent market decline has done more than cause your investments to decrease substantially. It’s probably also caused you to rethink your retirement plans. After all, the only thing worse than retiring later than you planned is to retire and quickly run out of money.

But how can you ensure you’ll have sufficient funds to last your entire retirement? So many of the variables used to calculate how much you need for retirement seem uncertain. What is a reasonable rate of return for your investments over the long term? How long will you live, knowing life expectancies are increasing? How much can you count on from Social Security and pension plans? If you’re concerned about running out of money during retirement, then you need to be very conservative with your retirement assumptions. Some tips to consider include:

Assume your retirement expenses will be at least 100% of your current expenses.

Most rules of thumb indicate you need between 70% and 100%, but figure on 100% to be safe. Nowadays, retirees want to travel, pursue hobbies, and live an active lifestyle. That generally means you’ll need the higher end of these estimates.

Add a few years to your life expectancy.

You should probably plan on living until at least age 85 or 90. If your family has a history of longevity, add a few more years to these figures. While you may find it hard to believe you’ll live this long, you don’t want to reach age 75 or 80 and find out you’ve run out of money. At that point, you might not have the option of returning to work.

Reduce your estimates of Social Security benefits.

The Social Security Administration sends benefit statements every year around your birthday, telling you how much to expect in benefits. While the Social Security system is currently in sound financial condition, that is expected to change after all the baby boomers retire. To be safe, count on benefits that are somewhat less than the Social Security Administration is estimating and don’t plan on adjustments for inflation.

Cut back on your living expenses now.

This has a two-fold impact on your retirement. First, it frees up money to set aside for your retirement. Second, you get used to a lower standard of living, which should also reduce your expected lifestyle for retirement.

Reach retirement with no debts.

Mortgage and consumer debt payments consume a significant portion of most people’s income. Pay off all those debts by retirement and you significantly reduce your cost of living.

Forget about early retirement.

Saving enough to last from age 65 to 85 or 90 is daunting. Trying to retire at age 55 or 60 is just not practical for most individuals unless they’re willing to reduce their lifestyle significantly. Working a few more years can go a long way in helping fund your retirement. Those years are typically your highest earning years, so hopefully, you’ll save significant sums during that period. Also, every year you work is one year you don’t have to support yourself with your retirement savings.

Consider working during retirement.

Especially during the early years of retirement, you should consider working on at least a part-time basis. Even modest earnings can help significantly with retirement expenses.

Plan on making conservative withdrawals from your retirement assets.

Don’t plan on taking out more than 3% to 4% of your balance annually. With that level of withdrawal, your funds should last for decades.

When should you elect to receive Social Security benefits – at age 62, full retirement age (which is gradually increasing from age 65 to age 67), or age 70? The decision will permanently affect your Social Security benefits. Start at age 62, and your benefits will be permanently reduced by 20.8% to 30%, depending on your year of birth. Wait until age 70, and your benefits will increase by 3.5% to 8% annually, depending on your year of birth.

Since Social Security benefits probably won’t be sufficient to maintain your current standard of living, first decide whether you have sufficient retirement resources even to consider retiring at age 62. If that is not an issue, keep in mind that it will take approximately 12 years for someone electing benefits at age 65 to receive the same total benefits as someone electing reduced benefits at age 62. It takes approximately 11 to 14 years for someone electing increased benefits at age 70 to receive the same total benefits as someone electing benefits at full retirement age. You may want to calculate precise numbers for your situation since your full retirement age and the percentage reduction in benefits at age 62 will impact your answer.

For most individuals, the long payback period may make it worthwhile to start benefits at age 62. And in fact, more than 60% of retirees elect for benefits before age 65, while less than 2% wait until age 70 (Source: U.S. News & World Report, June 3, 2002). But there are a couple of situations where you might want to wait until full retirement age.

If you plan to continue working, consider delaying benefits. Individuals who have attained full retirement age can earn any amount of wages without losing any Social Security benefits. However, between the ages of 62 and 65, you lose $1 of benefits for every $2 of earnings over $11,520 in 2003. Between the ages of 65 and your full retirement age, you lose $1 in benefits for every $3 of earnings over $30,720 in 2003. Individuals earning substantially more than these limits will probably want to wait to start Social Security benefits.

If your spouse is significantly younger and is counting on your benefits, you may also want to delay benefits. While you are alive, your spouse is entitled to the larger of 100% of his/her benefit based on his/her earnings or 50% of your benefit at full retirement age. However, if you elect benefits before the full retirement age, your spouse’s benefits will be reduced by a higher percentage than your benefits were reduced, provided he/she obtains benefits based on your earnings. If you delay benefits past full retirement age, you receive increased benefits, but your spouse’s benefits remain the same, provided he/she obtains benefits based on your earnings.

After your death, your spouse’s benefits are based on your benefits and the age he/she elects to receive benefits. He/she receives 100% of your benefit, provided your spouse is over the full retirement age. If he/she is younger than full retirement age, your spouse receives between 71.5% and 100% of those benefits. Thus, the larger your benefit is, the larger your spouse’s benefit will be after your death.