OCEAN CITY — For previous generations, retirement planning generally meant one thing: saving and investing for the time when you would no longer bring in an income. Nowadays, with people living longer, health care costs rising, pensions disappearing and people increasingly embracing more active, adventurous post-career lives, retirees need to be a lot more deliberate about making their money last. In fact, according to Merrill Lynch Affluent Insights Survey conducted in February 2012, two-thirds of the women polled, and 54% of the men, were not confident that their assets would see them through a long retirement.
"It used to be that retirement planning consisted of accumulating enough assets to achieve the number — some target of how much money you needed before stopping work," says David Tyrie, head of Personal Wealth and Retirement at Bank of America Merrill Lynch. "Then you calculated how much income you could safely draw from those assets each year. But a static, simplistic retirement plan no longer works as well."
Retirees today require a thoughtful approach that’s tailored to their circumstances — aligning their spending expectations with their income sources, longevity risks and other factors. Your financial advisor can help you create a customized drawdown strategy through a step-by-step process that’s grounded in the following questions. This week, we look at two of the 10 questions:
1. What kind of life do I want in retirement? The amount of income you’ll need is based on a number of considerations: where you’ll live, how much you’ll travel, to what degree you may continue to work, and many more. For couples, this conversation may involve making compromises about what they both want. Or you may decide to create parallel strategies that reflect different attitudes about investment and longevity risk. A wife may be more concerned than her husband about the possibility of running out of money during a long retirement — a realistic concern because women have a longer life expectancy than men. Therefore, her approach may be somewhat more conservative than his.
"People who worry about living a very long time should focus on spending less now to give themselves more later," says Moshe Milevsky, professor of finance at the Schulich School of Business at York University in Toronto and author of the recently published book The Seven Most Important Equations for Your Retirement: The Fascinating People and Ideas Behind Planning Your Retirement Income. Those less concerned about their longevity are likely to decide that their 3% chance of living to 100 isn’t enough to discourage them from a higher standard of living early in retirement.
2. How much will I spend? First, it’s important to determine the basic costs that must be covered — mortgage or rent payments, utilities, food, Medicare premiums, and the like. Then you can consider the things you’d like to do — whether it’s starting a business or relocating to another town to be closer to family. You should make a list of your wants along with your needs, ranking them in order of priority.
As you do, however, bear in mind that many people tend to overestimate how much they can afford to spend in the early years of their retirement. When calculating your optimal spending rate with your financial advisor, consider such factors as your age, risk tolerance, liquidity needs, time horizon, asset allocation and whether you want to leave a sizable inheritance.
(The writer is a senior financial advisor and can be reached at 410-213-8521.)