Friday, June 5, 2015

When It Comes to Retirement Planning, One Size Does Not Fit All Part 2: How Much Income Will I Need In Retirement?

As discussed in our previous blog post, When It Comes to Retirement Planning, One Size Does Not Fit All Part 1: The Safe Withdrawal Rate, individuals facing retirement are now being involuntarily thrown into the role of retirement planner due to the gradual extinction of defined benefit pensions.  Without the proper education and training, these individuals have to trust broad, general assumptions regarding retirement planning; which, needless to say, presents several problems.

In part 1 of this blog, we discussed one assumption of retirement planning – the safe withdrawal rate.  While research suggests that 4% is regarded as the safe withdrawal rate, these studies are not solidified with 100% confidence and should not be applied to every individual.  For more information on the safe withdrawal rate, refer to part 1 of this post.

What Percentage Of My Working Income Will I Need?

Another issue those approaching retirement face is trying to determine how much income they will need in retirement, often stated as a percentage of their working income. This is a critical determination as to underestimate your retirement income need could put tremendous strain on your retirement assets and result in either an income shortage or a depletion of assets. Again, there is no shortage of research available that generally concludes that between 70-90% of working income is sufficient in retirement. While this may be fine for many retirees, it is not based on individual factors. Without examining specific circumstances, this may lead many to make incorrect assumptions about when to retire and how much income is needed.

For those whose retirement is still far in the future, this may be a fine assumption to provide a general gauge on your retirement preparedness. However, for those whose retirement is approaching within the next 5-10 years, a more in-depth analysis of your income need is a must. If you believe you can survive retirement on less income than while you are working, why? Will the mortgage or other debt obligations be paid off? Do you have expenses associated with work, for example commuting costs, that will decrease or disappear entirely? Will your taxes change and possibly be lower? (This last question is important. Many assume they will be in a lower tax bracket when retired, but that is not always the case.)

At the same time, are you taking into consideration other expenses that may actually increase when retired? Will you travel more? Will you eat out more? Do you have more time for hobbies that might involve purchases or costs? Will you spend more time (and money) with family and friends? Even more, are there expenses that were covered while employed that will now need to be paid for out of your income, for example health insurance and life insurance?

Without considering these, and many other questions, accepting the general guideline that you will be fine with 70-90% of working income is a risky proposition. Again, we are not challenging the overall premise of these concepts – they provide an excellent starting point for the retirement discussion. However, they should not be expected to provide a high level of confidence and are not intended to be applicable to everyone. Instead, we believe everyone should have a comprehensive retirement plan that is designed specifically for them based on their personal resources, goals and objectives.

The Necessity for an Individualized Retirement Plan

At Kemp Harvest Financial Group recommend that everyone have an individualized retirement plan that is designed around their specific circumstances and goals. More importantly, we believe this plan should provide a degree of certainty through the plan design itself, not in general concepts or rules of thumb. When it comes to retirement planning, one size does not fit all.

For more topics like this, check out our radio show “Retirement Plain and Simple” every Saturday morning at 8 on WNPV 1440 AM and like us on Facebook!

If we at Kemp Harvest Financial Group can help you in any way with regard to your financial planning needs, please feel free to contact us.

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Author: Todd Little, CFP®, AIF®

Todd Little is a financial planner with Kemp Harvest Financial.  Todd is a CERTIFIED FINANCIAL PLANNER professional and has a Bachelor of Science degree in Economics from Pennsylvania State University.  Todd is a member of the Financial Planning Association and holds FINRA Series 6, 7 and 63 licenses.  In addition to meeting regularly with clients, Todd works very closely with Mark Kemp and our client service staff to create individual retirement income plans and help our clients navigate the retirement process.