The most important part of any long-term financial strategy is having a strong plan. Especially as you prepare for and approach retirement. It’s crucial to know what benchmarks you’re aiming for to ensure you’re on the right path, and what to do when you reach those benchmarks. Remember, a solid plan pays dividends over the years.
#2: Expect Pullbacks
The market is inherently volatile. It goes up and down. If it didn’t, there wouldn’t be any reward for investing. Even in the best years, there are pullbacks that can worry investors. However, these pullbacks are a natural part of the system. Without them, we’d see countless unpredictable bubbles and terrible crashes. Accepting that the market fluctuates is a key factor for long-term success.
#3: Don’t Panic
That being said, sometimes, things look extremely bleak and investors have a tendency to panic. This almost never ends well. For example, in 2020, when the pandemic first swept the globe, the market lost 34% of it’s value. However, by the end of the year, the market gained 16%. *It can be difficult, but staying the course and sticking to your plan is the only way to ensure long term success.
#4: Have a Safety Net
As you’ll be drawing from your investments come retirement, it might seem like taking a loss is the only option you have when the market takes a bad turn. This is why having a 3 to 6-month safety net is so important. Should the market fall as it did in 2020, having a safety net not only ensures you don’t take a loss, it leaves your money in the market for the rebound rally that generally follows such events.
Putting it All Together
Putting this all together may seem complicated, but at Starfox Financial Services, our team will work with you to create a plan that will weather the most volatile markets, and we’ll be here to guide you through both good times and bad. Start planning for your retirement by feeling out the Financial Planning Questionnaire!
Disclaimer: Starfox Financial Services, LLC makes no promises or guarantees. The information presented is general in nature and not specific to any investor. Starfox Financial Services, LLC does not give tax or legal advice. Please consult your advisor for how this may relate to you.
What Social Security Gives, Medicare, Taxes, and Inflation Take Away
The Social Security Administration revealed the cost-of-living adjustment will increase by 5.9% in 2022. The greatest increase in over 40 years. However, be prepared for Medicare, taxes, and inflation to eat away at your adjustment.
The Social Security adjustment is not the only thing increasing in 2022. Medicare Part B, which covers doctors’ fees, and outpatient services, will also increase drastically. The trustees for the Centers for Medicare & Medicaid estimated this past summer that the premium would jump to $158.50. The government announced this week Medicare Part B standard premium will rise by 14.5%, making it $170.10 in the coming year, far above the estimate.
What does this mean for high-income retirees? The effect of rising Medicare premiums is even more consequential for those whose premiums tie to their income. These Social Security beneficiaries above the combined income thresholds will pay taxes on up to 85% of their benefits.
As inflation prompts higher annual benefit adjustment, more families will pay taxes on their benefits, resulting in an overall reduced net benefit.
These adjustments will continue to rise in the future. Consider consulting with our financial advisors to review how these changes may affect the course of your retirement. Schedule a consultation with one of our planning experts here.
How Medicare Part B Takes a Bite Out of Social Security COLA
This answer may vary based on your age, location, investments, and pre-retirement income. However, research published by Schwab Retirement Plan Services in 2019 illustrates two things. First, 401k participants believe they need $1.7 million, on average, to retire. Second, many are not on track to get there.
Are you on track to retire? Let’s find out…
# 1: How much do you intend to spend?
What are your expectations for retirement? Do you plan on living the same lifestyle? Would you like to travel more? Live modestly? This is the most important factor in determining how much money you will need to support your desired quality of life.
Studies show a majority of people want to maintain their comfortable lifestyle after leaving the workforce. Generally, you need 80% of your pre-retirement income to cover your cost of living in retirement.
Example: Married couple Jack and Jill are 65 and decided they would like to retire in 2 years. Their current household income is $150,000/yr. To continue living the same lifestyle pre-retirement, they need $120,000 per year, $10,000 per month.
#2: Do you have other sources of income?
Another factor to consider is reliable sources of income such as social security, annuities, pensions, and part-time work. Social Security replaces about 40% of the average American’s pre-retirement income all by itself. This percentage is typically lower for higher-income retirees, but for most people, SS is a significant income source. If you’re not sure how much to expect, check your latest Social Security statement or go to SSA.gov to get an estimate based on your work history.
Example: Jack and Jill need $10,000 per month to maintain their lifestyle. This amount can be adjusted depending on additional sources of reliable income.
Jack and Jill anticipate $2,200 in Social Security benefits and a $1,800 monthly pension. This means $4,000 of the $10,000 needed will be taken care of by other income sources other than their savings.
$10,000 – $4,000
Monthly Income required = $6,000
Use this formula to estimate your monthly income required:
Estimated monthly retirement expenses – Monthly retirement income from other sources of income = Monthly Income Required
#3: How much do you need to save?
After determining how much income you will need to generate from your savings, the next step is to calculate how large your nest egg needs to be to produce this much income.
Start with the 4% rule! In your first year of retirement, you can withdraw 4% of your retirement savings. For example, if you have $1 million saved, you can withdraw $40,000 in the first year of retirement. In subsequent years of retirement, you would adjust this amount upward to keep up with cost-of-living increases. The idea is if you follow this rule, you will not have to worry about running out of money in retirement. Specifically, the 4% rule is designed to make sure your money has a high probability of lasting for a minimum of 30 years.
Example: Jack and Jill have a combined balance of $1.2 million in their 401k. If they withdraw 4% the first year, this will generate $4,000 per month, $48,000 per year.
In summary, Jack and Jill need $120,000 a year in required retirement income. Their SS benefits and pension will take care of $48,000. By using the 4% rule, they can also distribute $48,000 from their $1.2 nest egg in the first year. However, they are still $24,000 short of $120,000/yr.
We predict Jack and Jill will need $1.8 million, including their SS benefits and pension fund, to maintain their current lifestyle in retirement.
#4: How much will you earn on your savings?
Time is a very important factor when saving for retirement. Small amounts invested early in your career can grow substantially. Realistically many individuals can’t afford to set aside 15% of their income for retirement. However, don’t let that number discourage you, putting aside any amount for retirement positions you to benefit from compounding as soon as possible!
Investor B: waited until 35 to start saving but invested $200 a month. They would have almost $200,000 less in their retirement balance by age 65, despite contributing $25,000 more.
A difference in just ten years can drastically impact potential returns earned by your investments.
#5: Bottom Line
The bottom line, there isn’t one perfect method for calculating retirement savings targets. There are many factors to consider when coming up with your own target such as investment performance, inflation, time, location, personal goals, etc. With our advanced technology and extensive research, our team is able to identify hundreds of these factors, to create a personalized plan just for you. Ask us about the Starfox Planning Tool or create a plan of your own by filling out the planning questionnaire above.