Life expectancy in the U.S. has doubled in the last 200 years, and now the average 65-year-old will live to be 84. And that's just the average. If you're a married couple in your 60s there is a 50 percent chance that one of you will live to age 95! Potentially, that's 30 years in retirement if you stop working at 65. With our longer life spans, financial planning for retirement has never been more important if we want to maintain our lifestyle over the long term.
Financial planning should always be considered a verb not a noun. This simply means that planning is an evolving process because life is fluid and ever changing. There are a multitude of changes and modifications, such as shifts in financial markets and changes to tax rates or government programs, that take place over time that will affect the outcome of your retirement and financial plan. Analyzing how these changes impact your retirement income and cash flow over a 30-year retirement is no small task.
There are many factors to be considered when planning for retirement. One of the biggest concerns most people have is what to do when their salary stops and they must rely on income from "other" sources.
Here are a couple of questions to consider:
Did you retire too soon? Currently only 16 percent of American men work past their 65th birthday. In the planning process, we have found that working just two to three more years has a profound impact on a successful retirement and cash flow requirements. Many are also considering part-time work or being "semi-retired" to augment income needs—in effect, easing into retirement.
How much income are you generating? Where is your money going and will it last? Put together an expense budget for "survival needs" and "lifestyle" expenses.
Survival needs are non-negotiable expenses, (food, clothing, shelter, health care) and they should be secured with income-producing assets like pensions, annuities, social security, rental income, and bond income that are independent from stock market declines. When the market is down, you don't want to negotiate your survival needs.
Lifestyle expenses are discretionary and negotiable, (entertainment, eating out, travel, vacations, new car, luxury items) and they are usually funded with income and capital gains generated from a balanced portfolio of stocks, fixed income, and cash. With a long retirement on the horizon, a portfolio is a necessary component to keep pace with inflation. Most people underestimate the impact of inflation on their retirement plans. Historically, the rate has been about 3 percent per year. Consider this: If you need $60,000 per year to live now, in 10 years you would need $80,000, and in 20 years you would need $108,000 just to keep pace with a 3 percent inflation rate. We need growth in our portfolios.
When you consider the many different scenarios that can impact your retirement, having a trusted and professional financial planner makes the process easier and more effective. It's a long journey, you should find the right guide and take them along for the trip.
Dean J. Catino , CFP®, CPRC, is a managing director and cofounder of Monument Wealth Management in Alexandria, Va., a full-service investment and wealth management firm. Monument Wealth Management is backed by LPL Financial, an independent broker-dealer and Registered Investment Advisor, member FINRA/SIPC. Monument Wealth Management has been featured in several national media sources over the past several years. Follow Tim and Monument Wealth Management on their blog Off The Wall , on Twitter at @MonumentWealth and @DeanJCatino, and on their Facebook page. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendation for individual. To determine which investment is appropriate please consult your financial advisor prior to investing. All performance references are historical and are not a guarantee of future results. Strategies involving asset allocation and diversification do not ensure a profit or protect against a loss.