Planning for retirement is not easy. The key to planning is to reduce the probabilistic aspects of your retirement and manage other risks effectively. Above all, this process is very personal.
For my next four articles, I will give you the following retirement planning lessons based on what we have at Go2Income (opens in a new tab) have learned over the past five years:
- One size does not fit all, especially in your retirement planning
- Understanding the numbers – and what drives success
- The plan should last a lifetime – but should adapt to the events in your life
- Get your order right – Do the same for your planning in the right order
Concrete example of choosing the right size
Had a great preschool shopping day with my grandkids in late August. While helping them find a few items, I spotted a style of t-shirt I admired in different shades of my favorite color (green) and wandered over to that rack. I considered the size, the many shades of green, the pre-adjustment to the trigger and, of course, the price.
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Before the kids got too anxious, I picked the one that suited me best and bought it. I guess you don’t care much about how I dress, but I mention this scenario to show how important it is to reject the concept of “one size fits all”.
Virtually anything can be customized to suit us individually. And that includes a retirement income plan.
New retirement rules of thumb still have problems
I’m not alone in advocating a new way of looking at retirement planning. The New York Times wrote much the same thing (opens in a new tab).
In the article, financial journalist Tara Siegel Bernard quoted experts who essentially said the 4% rule of thumb (a “one size fits all” rule) is dead. Experts, however, have come up with new rules of thumb that aren’t much better. Their ideas were at least somewhat adaptable to specific circumstances, but they followed the same narrow path: pick an income goal and test it to see if it fails. If that fails, reduce your spending.
Message to experts: Your test results can fail at any time without warning, leaving retirees no choice but to downsize.
A rule of thumb is not the best way to determine what is probably the most important financial decision of your life.
Consider your main sources of income
To achieve your best retirement income plan, look at all the major sources of income that make sense for your situation and create a plan where the lion’s share is in the form of protected income.
- Understand and properly use the different sources of income—dividends, interest, annuities, and withdrawals (involving sales of securities)—from your savings.
- Select long-term planning assumptions for markets and inflation knowing that you are unlikely to achieve them in the short term.
- Monitor your plan, reproject planning results in real time, and update your plan as needed. Note: the more secure income you have, the less volatility you will face.
Expect variability in results when planning
Let’s see how the above approach might work for a consumer making a plan with advice from Go2Income. We reviewed the results of Go2Income plans ordered during the week ending September 16th. The average Go2Income visitor had $1.6 million in retirement savings (about half was in a rollover IRA), and half of those retirees wanted to leave a legacy of their current savings. Sixty-three percent were married with an average age of 66.
Based on all of these stats, the average Starting Income Percentage (SIP) was 5.01%. So, have we declared victory with our new 5% rule of thumb? No. It’s not about being the highest, it’s about being the right person. Plus, the SIP is just the start (no pun intended) of a Go2Income plan. It is important because it tells you how much your savings income contributes to your income goal. But a plan must also consider inflation, lifetime income, inheritance and liquidity.
Even so, since it’s the first thing a visitor sees, you should be aware that it needs to be personalized. The SIP for these visitors ranged from 3.98% to 7.36%. Many factors affect this result, but age, gender and marital status are key, with male only, female only and couple averaging 5.54%, 4.87% and 4.97%, respectively.
Use SIP to customize your plan
I apologize for all the numbers, but a retirement income plan is defined by the type of retirement you want and deserve. One thing that immediately becomes apparent is how the pricing of annuity payments affects your plan. With interest rates rising and annuity payout rates improving, all SIPs are higher than they were at the start of the year — from 4.55% to 5.01%.
And, of course, there are additional plan options you can adjust to meet other SIP or retirement goals. For example, if you want to rely on inflation protection from Social Security benefits or income-producing real estate, you can factor in a lower inflation rate. A 2% to 1% reduction in assumed annual inflation would increase the average SIP from 5.01% to 5.54%.
More than a t-shirt, the plan should be designed just for you – and your SIP is an effective way to start.
Are you looking for higher retirement income? Go2Income experts can help you. Start by answering a few simple questions and receive a free custom plan (opens in a new tab).
This article was written by and presents the views of our contributing advisor, not Kiplinger’s editorial staff. You can check advisor records with the SECOND (opens in a new tab) or with FINRA (opens in a new tab).
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