What accounts do you use to save for retirement? If you’re like many workers, a 401(k) or other employer-sponsored plan is part of the mix. You may also have an IRA, annuity or other types of investments.
You likely track the balances of these accounts, so you can gauge their performance. But do you track and measure the retirement income that your accounts can generate?
If the answer to that question is no, you’re not alone. A recent study from the LIMRA Secure Retirement Institute (LIMRA SRI) found that more than half of all workers don’t know how their retirement assets will translate into income.1
The study also found that a retirement income estimate leads to greater confidence in retirement planning. Nearly 70 percent of workers felt more confident in their strategy and their ability to retire after estimating their income. Conversely, only 30 percent of those who haven’t seen an estimate were confident about their ability to retire.1
An income estimate could be a key part of your retirement strategy. After estimating your income, you may find that you’re off track and need to make changes. It could lead to adjustments that help you retire on schedule. Below are a few tips to help you develop a retirement income estimate:
Consolidate your accounts and information.
One of the biggest challenges with estimating your retirement income is that your assets may be spread across several different accounts. You may have a 401(k) with your current employer and even old retirement accounts left behind at former jobs. Perhaps you have several IRAs or annuities. You may even have multiple financial professionals servicing your accounts.
It’s helpful to consolidate your accounts and information as much as possible. Of course, it may not be feasible to combine all accounts, but you can at least gather all the statements for a comprehensive analysis. Most financial professionals can put together a retirement income estimate based off your statements, even if the accounts are held at other firms.
Estimate a reasonable amount of income.
There are a number of easy rules of thumb you can use to estimate your retirement income. They may not be accurate or precise, though. One of the most commonly used methods is to assume that you can withdraw a modest amount of your assets each year, such as 4 percent. The thinking is that a 4 percent withdrawal should last 25 years.
There are a few problems with this approach, however. One is that if you’re years away from retirement, you don’t know what your savings balance will be in the future. You can make an estimate based on potential growth rates, but those assumptions may not be accurate.
Also, your withdrawals are unlikely to stay level throughout your retirement. You may be forced to withdraw more because of inflation or rising health care costs. You may have emergencies that force you to take out more money. You may increase your income when your investments go up but then fail to cut your income if your assets decline.
These types of methods may be convenient for quick estimates. However, you’ll likely want a more precise projection as you approach retirement.
Create a budget and a precise income projection.
Perhaps the most effective way to project your retirement income is to back into it. Start by creating a projected budget of your retirement expenses. You can’t predict every expense, but you can probably make an educated guess based on inflation and your current spending.
Next, estimate your income from guaranteed* sources like Social Security and pensions. Compare those income streams with your budget. If your guaranteed* income doesn’t cover your budget, you’ll have to withdraw the difference from your savings.
This is where a financial professional can be valuable. They can help you determine what level of income you can currently generate and what steps you need to take to cover the gap. You may need to save more money. Or you may benefit from using tools such as annuities to create guaranteed* income streams.
Ready to estimate your income and boost your retirement confidence? Let’s talk about it. Contact us today at First Fidelity Group. We can help you analyze your needs and develop a plan. Let’s connect soon and start the conversation.
*Guarantees, including optional benefits, are backed by the claims-paying ability of the issuer, and may contain limitations, including surrender charges, which may affect policy values.
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18155 - 2018/10/17
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