Creative Aging: How to Make a Financial Retirement Plan
"The question isn't at what age I want to retire, it's at what income." —George Foreman
“As soon as I retire, I need to make all of my investments conservative ones in order to protect my assets.” That’s a common assumption of people approaching retirement, and Financial Advisor Devin Reimer says this assumption no longer works for most retirees. The reason? Longevity. “Retirees are now living longer,” says Reimer. “If they invest only conservatively, their returns will be lower, and they may run out of funds while they are still living.” A 65-year-old couple in good health has an 89 percent chance that one of them will live to 85. That couple has a 44 percent chance that one of them will live to 95.
In an interview, Reimer, who has been a financial advisor in Marion County for 12 years, provided me with the information that follows.
He advises clients to begin planning for their retirement in detail three to five years before their anticipated retirement date. He and his Registered Investment Advisor, intellicents, recommend clients think of their investments as two separate buckets.
In the first bucket, they should invest the amount of income they need for the first three years of retirement. The first bucket should contain short-term, conservative investments (cash, certificates of deposit, treasury bonds, and conservative bond funds).
He advises them to invest the remainder of their assets in a second bucket—long-term funds (stocks, equity mutual funds, and exchange traded funds). Those long-term investments are more volatile, carrying a somewhat higher risk, but historically they have also averaged a better rate of return.
How can people approaching retirement know what they will need as an annual income? Reimer says that number is not the same as their current gross income. Gross income has deductions that will not be taken from retirement income—deductions for a 401K investment, Social Security, and other benefits such as a health savings account. Income tax in retirement will also be different. For example, starting in 2023, retirees in Iowa will pay no state tax on any retirement income.
Since deductions will be different following retirement, it is wise to examine your currrent needs, beginning with your net income. To calculate your gross income needs in retirement, a good rule of thumb for most people is to take your current net income and add 12% for taxes.
(That percent is the income tax rate for incomes of $20,551 to $83,550 for a couple. For higher incomes or incomes for a single person, google “income tax brackets,” and you will find the current tax brackets for you.)
If your current take-home pay is $48,000 per year ($4,000 per month), you need an annual gross income of $54, 545 to match your current standard of living.
Social security will provide some of the gross income you need, and you can learn what your social security payment will be by going to www.ssa.gov, signing up for an account, and looking at your potential income statement.
For the sake of this example, let’s estimate your gross income from social security will be $24,000 per year ($2,000 per month).
If you subtract $24,000 per year from the gross income you will need, the remaining amount you need annually from investments is $30,545. When you retire, your short-term investments should total three times this amount—$103,635. (This formula is only an approximation because the amount of taxes you will owe can vary with the type of investment you are withdrawing.)
Having a three-year supply of funds in low-risk, easy-access investments will protect you from needing to withdraw money from long-term investments in conditions like the 2022 market, during which stock values have been down.
A financial consultant can help you calculate the chances that your long-term investment portfolio will last as long you live. If it looks as if you may run short, it might be wise to keep working and saving for a few more years. Or you might supplement your income with part-time work. Or you could look for ways to reduce your living expenses.
Approaching retirement is a complex subject, and the information above, which can change from one year to the next, only begins to scratch the surface of the variations, details, and choices.
What’s the bottom line? It is wise to begin planning in advance and to consult with a financial expert as you make those plans.
The above is provided for general information purposes only and is not intended to be investment advice. Consult with your financial advisor before making investment and donation decisions.
Adapted from Creative Aging by Carol Van Klompenburg, published 2023, available from Amazon and for Pella-area residents directly from Carol. Carol has an MA in theater arts and is available for reading performances of her writing on aging, moments in her gardens, and other topics.