Steve Vernon has been writing an ongoing guide to help Americans who are nearing retirement plan for their future. The task is tedious, and forecasting income needed for long periods of time is tough, but the advice laid out is sound. These are some highlights from Vernon’s plan that can help when thinking about savings, investments, and planning.
Income and Expenses
This may seem obvious, but knowing what costs to expect and how much cash will be needed is tough. Given that people are living longer, retirement planning is an increasingly complex activity as money needs to stretch over longer periods of time. According to Vernon, these four things will help determine your retirement income: Social Security, IRA, 401k and other retirement savings, pension income, and wages or self-employment. Part-time work and entrepreneurial activities can be a great way to supplement income in retirement, and using these four sources as a guide can help give an accurate picture of what kind of revenue stream you can expect.
For expenses, perhaps the most basic thing one can do is to analyze your spending habits. This can help give an idea of what kind of life one wants to live, and whether or not any substantial sacrifices will be needed once retirement sets in. Taking family, emergencies, food, and housing into account may seem obvious as well, but the propensity to underestimate costs occurs commonly. Vernon also advises setting aside any investment accounts that may be dedicated solely to long-term expenses, as well as using a range of pessimistic to optimistic estimates when calculating portfolio returns.
Find an Income Generator
There are a few common options available when deciding how to generate retirement income, and Vernon points to annuities, dividends and interest, and capital withdrawals as the most preferable, with each having strengths and weaknesses. He points out that an average retired person can expect anywhere from 3 to 6 percent on their investments and suggests sticking to low-cost, no-load mutual funds if one is looking to live off of investment interest.
If one prefers the annuity route, he notes the need to understand how annuities are structured with fixed, inflation-adjusted, and variable rate annuities all being common place right now. The method that requires most caution is drawing on the principal of investments, as the amount has to be calculated very carefully unless one spends their portfolio too quickly. Vernon points to the “4 percent rule” as well as a T. Rowe Price calculator being useful in determining these.
Don’t Forget the Spouse!
Calculating in your partner is crucial to predicting the longevity of retirement funds. Vernon aptly highlights that married women are likely to be widowed five to ten years at the end of their lives. This situation is perhaps overlooked in retirement planning sometimes, and planning for one person to survive on the income can change how a retirement portfolio is structured. Moreover, a spouse’s social security is an important factor to consider, as each person may not need to start drawing at the same time. Perhaps more basically though, when planning for retirement, according to Vernon, having two brains constructing the plans is always better than one.
Don’t Miss: The ‘Recovery’ is Weaker Than You Think.