Kayla Thompson, Fall 2023 Intern at Next Bloom Wealth, recently surveyed individuals in the Kansas City Area regarding their primary retirement planning concerns. Survey participants ranged from 1-2 years away from retirement, 3-7 years away from retirement, and 8+ years from retirement. To identify common trends, participants were asked the same set of questions.
This is the third of a three-part series focusing on shared worries for those 8+ years away from retirement. For each set of common concerns, Next Bloom Wealth provides advice on how to tackle them.
What’s my Retirement Number?
Survey participants shared a common desire to understand what amount of retirement savings is appropriate to maintain the same lifestyle in retirement.
Developing your retirement number
You should consider the 25x rule when determining your retirement number. If you desire $50,000 in income in your first year of retirement, you’ll need $1,250,000 in investment assets if you have no other fixed income. This rule of thumb is based on the “4% rule,” which suggests that you can withdraw 4% of your retirement savings annually during retirement, adjusted for inflation, without running out of money over a 30-year retirement period. This rule assumes a balanced portfolio of stocks and bonds. Keep in mind that this rule is a general guideline and not a guarantee, and the appropriate withdrawal rate can vary based on individual circumstances.
Determine Your Retirement Income Needs:
- Calculate your expected annual expenses in retirement, including housing, healthcare, utilities, food, transportation, and leisure activities. Consider any debts you might still have and potential healthcare costs.
Assess Other Sources of Income:
- Consider other sources of income in retirement, such as Social Security, pensions, part-time work, or rental income. Factor these into your overall retirement income.
Estimate the Length of Retirement:
- Consider your life expectancy and plan for a retirement that may last 20, 30, or more years. Ensure your savings can sustain you throughout your retirement.
Use a Retirement Calculator:
- Utilize retirement calculators available online or consult with a financial advisor to estimate the amount of savings needed to meet your retirement income goals. These tools can help you account for inflation, investment returns, and other variables.
Factor in Healthcare Costs:
- Consider healthcare costs, including insurance premiums, out-of-pocket expenses, and potential long-term care needs. Healthcare costs can be a significant factor in retirement planning.
Adjust for Inflation:
- Account for the impact of inflation on your future expenses. Future dollars will likely have less purchasing power, so it’s essential to factor in the rising cost of living.
Balancing Today & Tomorrow
Survey participants shared a desire to balance living today against the need to prepare for retirement.
Balancing living today and saving for tomorrow is a dynamic process that requires ongoing attention and adjustments. By establishing clear goals, creating a realistic budget, and making informed financial decisions, you can achieve a healthy balance between enjoying the present and securing your financial future.
Establish Clear Financial Goals:
- Define your short-term and long-term financial goals. Prioritize them based on their importance to you. This could include saving for emergencies, paying off debt, saving for a home, or building a retirement nest egg.
- Set up automatic transfers to your savings or investment accounts. This ensures that a portion of your income is consistently directed towards your savings goals before you have a chance to spend it.
- Prioritize building an emergency fund to cover unexpected expenses. Having a financial safety net can prevent you from dipping into your long-term savings in case of emergencies.
Take Advantage of Employer Benefits:
- If your employer offers retirement savings matching, contribute enough to maximize the employer match. It’s essentially free money that can boost your long-term savings.
Set Realistic Expectations:
- Set realistic expectations for your lifestyle. While it’s important to enjoy life, be conscious of the trade-offs and understand that delayed gratification can lead to greater financial security in the future.
Explore Additional Income Streams:
- Consider ways to increase your income through side hustles, freelancing, or pursuing additional skills that can enhance your earning potential.
Uncertainty with retirement planning variables
Several Survey Participants shared concerns over things that are outside of their control, including: inflation, taxes, healthcare costs and market stability.
Managing Change Across Time
Retirement planning involves managing a variety of variables, and while some factors are within your control, there are others that may be influenced by external forces. Here are strategies to manage retirement planning variables that are outside your control:
- Strategy: Diversify your investment portfolio to spread risk. A mix of asset classes and geographic regions can help protect your savings from the impact of economic fluctuations or market downturns.
- Strategy: Maintain a robust emergency fund. Having a financial safety net can help you weather unexpected expenses or changes in circumstances without jeopardizing your long-term savings.
Government Policy Changes:
- Strategy: Stay informed about potential changes in government policies, such as Social Security or tax laws. Be prepared to adapt your retirement plan based on these changes.
- Strategy: Recognize that market fluctuations are part of investing. Avoid making impulsive decisions based on short-term market movements. Stick to a well-thought-out investment strategy aligned with your risk tolerance and long-term goals.
- Strategy: Understand that changes in employment, such as job loss or a forced early retirement, can impact your retirement plan. Develop contingency plans, such as having an emergency fund, and explore options for part-time work or consulting if needed.
- Strategy: Economic conditions, such as interest rates and inflation, are external factors. Stay informed about economic trends, and adjust your investment and spending strategies accordingly. Be flexible in adapting to changing economic environments.
Regularly Review and Adjust:
- Strategy: Regularly review and reassess your retirement plan. Life is dynamic, and circumstances change. Being proactive in regularly reviewing and adjusting your plan can help you stay on track toward your retirement goals.
Retirement planning is a dynamic process, and it’s never too late to make adjustments to improve your financial readiness for retirement. A financial professional can assist you in developing a plan that aligns with your goals and helps ensure a comfortable and secure retirement. If you would like a retirement readiness checkup, click here on ‘start here.’
About the author: Kayla Thompson is a senior at Park Hill South High School and is participating in the Professional Studies Program as a Fall 2023 intern at Next Bloom Wealth. She plans to attend Kansas State University and major in Finance.
This article is for educational purposes only. For individualized advice, please contact a qualified financial planner or tax professional.