Planning for retirement can be very difficult. Interest rates are at historic lows, pensions are scarce and those with pensions are concerned about their solvency, the financial stability of Social Security is in question, and people are living longer than ever before. These concerns generate a lot of questions from those planning for retirement. Here are some of the most frequent questions people ask us.
Where will my retirement income come from?
According to the Social Security Administration, many retirees receive income from four main sources:
- Personal Savings and Investments — This includes taxable investment accounts and retirement accounts such as IRA, 401(k)s and other company sponsored plans. The 4% rule suggests a diversified investment account can sustain withdrawals of 4% of the value each year and increase to match inflation.
- Earned Income — Some retirees choose to maintain a part-time job during retirement. According to a recent survey by AARP, 80% of the baby boomers plan to work after they retire.
- Company Pension Benefits — The Bureau of Labor Statistics reported in 2011, only 10 percent of all private sector establishments provided defined benefit plans, covering 18 percent of private industry employees. About 78% of state and local government workers had such coverage.
- Social Security Income — Discounted benefits can begin as early as age 62 but your earned income will be limited. Earned income is not penalized after you reach “Full Retirement Age” as defined by Social Security. Full retirement age is 66 for workers born between 1943 and 1954. It scales up to age 67 for those born after 1954.
How much will my income need to increase to keep up with the cost of living?
The annual increase in the cost of living (as measured by the Consumer Price Index) has averaged 2.9% over the past 30 years. A healthy couple retiring at age 65 has a joint life expectancy of 30 years. If they are budgeting $5,000 per month for expenses when they retire, they’ll need $12,000 per month to cover the same expenses in 30 years. A 5% inflation rate would increase the cost of those same expenses to over $21,000 per month. This is why it is so important to have an increasing stream of income during retirement.
What percentage of my final working earnings will I need in retirement income?
Some retirement resources suggest 66% to 75% of final earnings as a “rule of thumb.” However, we recommend creating a budget as you near retirement to track your monthly expenses. Add items like travel, golf, entertainment, gifts, etc. to the budget to be sure you have discretionary income available. Another method is to review how much income you had available to spend last year. Did you spend it all? If so, last year’s take home pay is a good amount to target.
When should I begin taking my Social Security benefits?
Benefits are reduced by about 1/3 for those drawing at age 62 rather than waiting to draw full benefits at age 66. The four year head start will even out at about age 82. However, life expectancy is not the only issue to consider. Drawing Social Security early allows you to preserve your own savings longer. You’ll need income from somewhere if you’re retired at age 62. You can keep your savings invested and growing longer by using your Social Security benefits to meet your living expenses.
In general, you should consider drawing Social Security benefits early if you believe the financial challenges currently facing the system will adversely affect your benefits; you’re unsure about the length of your life expectancy; or you’d like to preserve your personal retirement savings. You could consider drawing Social Security benefits later if you’ll be continuing to work and have earned income between age 62 and full retirement age; you come from a family with longer life expectancies; or you believe your spouse may outlive you and you want to provide him or her with a higher amount of your benefit.
What’s the best way to get an accurate estimate of my Social Security benefits?
You probably noticed you are no longer receiving an annual Social Security benefit statement in the mail. The administration quit mailing out the statements in 2011. An online statement can be created to provide all the information you used to get on the paper statements. To get your statement online, you must first create an account on the Social Security website. The site requires you to provide some personal information about yourself and then answer a few unique questions that will be used to confirm your identity the next time you log in. The site instructs you to create a user name and password for the account. Once you have an account, you can view your Social Security Statement online at any time.
See the other posts in the series here:
- Common Questions About Social Security
- Three More Questions Retirees Ask
- More Common Retirement Questions
- What You Need to Know About RMD’s
- Answers to Your Rollover Questions
- How to Manage Risk in Your Retirement
- The most difficult part of retirement planning is the impact of inflation over a 30-year life expectancy for healthy 65-year old couples.
- Careful budgeting is needed as you near retirement to accurately estimate income needs.
- There is no simple rule of thumb for when to draw Social Security benefits. Consult a retirement planner to make sure all the issues are covered.