October is financial planning awareness and retirement planning awareness month. Although many people are saving for retirement, we hear many of the same questions when clients ask about their retirement needs. According to a 2019 report from the Federal Reserve, retirement accounts are the second-most common financial asset (after transaction accounts) and “nearly two-thirds of working-age families participated in retirement plans in 2019.” At the same time, the Financial Planning Association (FPA) found that only about one in four passed a “retirement income literacy quiz,” which they believe shows “a lack of retirement income planning knowledge that limits clients’ participation in their own retirement decision-making and lowers their satisfaction with the process.”
Here are the top 5 questions clients ask about their retirement savings.
When should I start saving for retirement?
This might be the most commonly asked question and the easiest to answer. Start saving for retirement as soon as possible. We know that paying off student loans, buying a house, and starting a family can impact retirement savings. However, time can be a tremendous asset in retirement planning. The earlier contributions begin, the greater the benefits of compounding investment returns. We recommend people save 10-15% of their pre-tax income. If your employer offers a matching 401(k) contribution, be sure to maximize that benefit through salary deferral.
How much do I need to retire?
Like most financial decisions, how much you need to retire is partly dependent on what you want and what your goals are. Do you want to work in retirement? Do you want to travel? Do you want to buy a second home or downsize? When we work with clients to plan for retirement, we take these types of goals into consideration. Financial planning helps you determine not only what you have invested today, but also projects your investments and the income from those investments throughout your retirement years. We are then able to compare that to your expected lifestyle and needs in retirement.
How do I know if I have enough?
This is one of the hardest questions to answer, because even if you know your goals and current financial situation, you have to estimate many unknowns. How long will you live? Will you be healthy? What will you spend? What will the rate of return be on your investments in the future? Estimating these variables is helpful, but because they are variables that can change often, solid financial planning involves evaluating scenarios and revisiting your goals and investments periodically.
What percent can I draw off my assets?
You may have heard of the 4% rule – that you can draw 4% of your total assets each year during retirement. However, this rule does not take into account every investor’s unique financial situation. Your risk tolerance and therefore investment portfolio could vary greatly from the assumptions used in the determination of this guideline. Furthermore, it uses a 30-year time horizon which may not accurately reflect your planning. Customized planning provides the greatest insight into cash flow analysis for retirement.
When should I claim Social Security?
Benefit eligibility for Social Security begins at 62, the earliest retirement age. However, this isn’t always the best time to begin claiming benefits,since benefits are reduced before your Full Retirement Age (FRA). If you are born between 1943 and 1954, your FRA is 66, and if you are born between 1955 and 1960, your FRA increases incrementally to 67 years old.
Claiming benefits before your FRA when you still have earned income may lead to a loss of part or all of your Social Security benefits. Waiting until after your FRA eliminates any reduction in benefits due to continued earnings and also provides for an increase in your monthly benefit. If you can defer beginning benefits even longer (even by a partial year), you’ll increase the monthly income you receive for the rest of your life. For some, deferring to age 70 will provide the largest amount of overall lifetime benefits from Social Security. A number of factors will affect your decision to begin benefits including your desire to continue working, your health, and even potentially your family longevity.
These are just a few of the questions we often hear from clients. The answers to these questions will be different for each person, depending on your financial situation. Our financial planners want our clients to be active in their financial planning process and education is important to what we do. For each part of your financial plan, including retirement, you’ll have individual factors (like health status, life expectancy, need for income, and other assets) to consider before making any financial decisions.
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