Are you a boomer preparing your retirement budget? I am too and there are serious blunders to avoid from what I am learning. I attended taxes in retirement seminars. My wife and I hired a true fiduciary financial advisor (fee only). In addition, I read countless retirement articles. What did I find?
What I found is boomers (and others) can avoid retirement budget blunders by following a few simple recommendations.
What’s the biggest threat to a financially comfortable retirement? Lack of knowledge. The decisions we make leading up to retirement are clearly important. How much do we need to save? How much do we invest? When do we claim Social Security, and so on. However, not planning for bear markets and not accurately anticipating recurring or non-recurring expenses in our retirement budget can result in serious consequences.
It is important to note the decisions we are making now won’t stop once we retire. We also need strategies for making withdrawals, paying taxes, and investing while retired.
Retirement Budget Blunders
Taxes in Retirement
I’ve learned from financial advisors and seminars that many boomers fail to plan taxes in retirement. As a result, they end up paying more taxes than those that plan ahead. Common boomer blunder from what I’ve been told.
In a nutshell, having a significant liquid account (non-retirement account) and/or lots of money in a Roth IRA is the way to go. Why? You and I can better control our withdrawals to limit our tax burden in retirement. Also, we won’t need to sell our investments at lower prices during a down market; sell high, not low.
Entering retirement in a bear market can cripple our portfolio. Continuing to withdraw funds as planned, say 4-5% plus an adjustment for inflation, is not advised during bear markets. Instead, we will withdraw less by using non-retirement funds we saved prior to retiring. Also, we can cut our expenses in the short-term. Our retirement budget includes discretionary expenses for this purpose.
Some cutting of expenses is almost always possible for those that plan ahead. If we can’t cut our expenses during a bear market, we’ll not increase our withdrawals for the inflation adjustment.
Another option? We can spend some of our time generating income. For example, part-time work doing something that we love to do anyway. Or, serving on a board, tutoring, or participating in focus groups that pay for our time.
Note that income in retirement can affect your social security and taxes. Nearly 19%, or 9 million, Americans ages 65 and over are working part- or full-time, according to a recent Pew Research Center analysis. This is consistent with a steady increase dating back to 2000. Read, Is working in retirement worth it? published at Yahoo Finance for more on the topic.
I’m a firm believer in establishing as much recurring revenue and as many income streams as possible; before I retire. I consider both the best use of my time with respect to planning for the future.
According to Kiplinger’s Personal Finance team, about 44% of workers take his or her social security benefit as soon as they are eligible (age 62). And, about 75% of retirees take their benefits before full retirement age. Should we claim Social Security benefits early? At our full retirement age? Or delay until we are 70?
If we take benefits as early as possible, we’ll receive about 25% to 30% less each month than we’ll receive at full retirement age. If we wait, we’ll receive 8% more in benefits for each year beyond our full retirement age. But, we might not live long enough to break even!
We learned the best time to claim our Social Security benefit is before we are age 70. A financial model prepared by our financial advisor (using our specific finances) make it clear the benefits of waiting until age 70 are minimal for us. It only makes sense, again for us, to wait until age 70 if we assume we’ll live significantly longer than average.
Determine your specific break-even age. And, think about what you’ll be doing at that age. More than likely, we won’t be quite as active at our break-even age. We believe we’ll enjoy the money more while we are a bit younger. Also, the amount of money we’ll lose if we live too long is rather insignificant compared to the growth of our portfolio.
Retirement Income and Expenses
Will we need 100% of our pre-retirement income in retirement? Probably not but the recommendations are mixed. Stop working and you won’t be paying payroll taxes or putting aside money for retirement savings. Work related expenses such as commuting and non-reimbursed work lunches will disappear. Senior discounts kick-in and we’ll have more time to seek better deals on everything we buy.
Retirement planners generally recommend saving enough to cover 70% to 85% of your pre-retirement income, but I’m not convinced that’s enough. We will likely travel more, start new hobbies (that cost money), and go out more often to avoid retirement boredom.
A retirement budget blunder here might be assuming your expenses in retirement will go down more than 10 percent. They might not go down at all depending on your specific lifestyle and finances.
Is the purchase of a new (or use) car in your retirement budget? How about a one-time home remodel? Or other non-recurring expenses?
Our financial advisor added “non-recurring” expenses to our retirement budget. They definitely have an impact on long-term cash flow. We are glad we are including several non-recurring expenses. Fewer surprises down the road and a blunder avoided.
Roughly 40% of retirees say they’ve spent more than they planned on travel. According to a survey from Capital Group and a report from AARP, the average baby boomer spends about $6,600 per year on travel. Is it in your budget? It is in ours.
We use Personal Capital software to track our cash flow, budgets, and investments (highly recommended). Note the Personal Capital link is an affiliate link; you get $20 for using our link and we get the same (win-win).
Retirement Savings Shortfall
Let’s say we intend to retire at age 66. How much should we have socked away for retirement by that time? Many financial advisors recommend saving an amount at least 8 to 10 times your annual salary. If you make $100k per year, for example, that’s at least a million to be safe.
I’ve heard a general rule of thumb is ten times your pre-retirement salary plus Social Security benefits should be enough to replace about 85% of your pre-retirement income. Although everyone’s situation is unique, planning to retire on less could be a blunder.
You might get by with saving less, if you have other sources of income or you can reduce your expenses in retirement. For example, let’s say you pay off your mortgage the day you retire. That reduces your retirement expenses for sure.
Not Investing for Growth in Retirement
Far too often, I hear stocks are risky investments for retirees. They do carry risk. But, we intend to invest for growth well into retirement. Why?
We plan to be retired for 20 years at least. Hopefully more. On average, a 65-year-old man is expected to live another 19 years. A 65-year-old woman is expected to live another 22 years. Investment growth during two decades requires taking some risk and owning some stocks.
A well balanced portfolio with the potential for growth is recommended based on my findings. And, we are planning for portfolio growth in our retirement budget. However, we are using relatively conservative numbers for our investment growth during retirement.
We plan to adjust our portfolio to become more conservative as we age. However, we don’t want to be overly conservative when we initially retire. I’ve been told one blunder for boomers is they become too conservative too early and they get out of stocks totally when they retire.
Under Estimating Healthcare Costs
This one is rather obvious given the media coverage on the topic. The cost of healthcare and healthcare insurance coverage is out of control. It is estimated we’ll need $250,000 or more to pay for healthcare in retirement. It is in our retirement budget.
I hope this information is helpful to you. Please leave a comment and let me know what you’ll be including in your retirement budget. Thanks.