Whether you've been single all your life or became single again after a divorce or widowhood, you will likely be making most (if not all) of your retirement planning decisions on your own. It will be up to you to secure your retirement years financially.
You'll need a retirement income plan that supports the lifestyle you envision – and one that lowers the risk of outliving your savings as much as possible.
Hopefully, you have been saving and investing over time and are looking to see if you have saved enough money or still need to save more.
To be certain, you will need to know three things:
how many years you need to finance,
what it will cost you to live each year, and
what your income sources will be.
Let's look at how to do that.
We all dream of living to old age. But the longer you live, the more assets you'll need to fund all those years.
There are two sides to calculating longevity. The first is when you actually retire, and the second is how long you will live. You can control the first one, but not the second. So let's look at one at a time.
When you retire. The day you stop working and receive your last paycheck, you go from the "accumulation" phase to the "spending" phase. Suddenly, the flexibility to save a little more or work a little longer ends, and your basic nest egg is defined. The focus becomes how you spend your money and manage it, generating the most income possible (net of taxes).
Each year you delay retiring is one less year you need to finance. But there are other benefits to delaying, too:
You can continue building tax-deferred funds in your IRAs and 401(k)-type employer plans or keep funding your pension.
Working until you reach Medicare's age at 65 means you won't worry about being left uninsured.
Every year beyond age 62 that you put off collecting Social Security adds noticeably to your retirement benefit, especially if you wait to the maximum at age 70.
How long you live. Estimating your life expectancy using government statistics or life insurance tables gives you just that: estimates. And you don't want to be on the wrong side of that estimate.
The Social Security Administration website has a Longevity Visualizer app that says a woman born in 1956, age 65 today, is expected to live to age 87. But she also has a 10% probability of living beyond age 98. Anytime you work with estimates and averages, you could live less – or more. But how much more?
Logically, if you have the resources, the safest bet is to plan to finance as many years as you can live. But, as life expectancy rises, you could be financing beyond age 100.
But there is a better solution, and it has to do with the nature of the resources you have in your retirement nest egg, as we discuss below, under "Identifying income resources."
Understanding what it will cost you to live is vital. There are often-repeated formulas (for example, you will need 70% to 80% of your pre-retirement income after retiring). But, again, you don't want to risk getting that figure wrong.
Instead, monitor your expenses carefully in the years leading up to your retirement date. One full year of recorded expenses is ideal for catching periodic expenditures you'd miss by looking at just a few individual months. In short, the more you are willing to record, the safer your cost projections will be.
Next, invest the time to envision the retirement lifestyle you'd like. Focus on the details of a typical day, week and month. See how this differs from how you spend your time (and money) today. Here's a structure you can use:
Make a list of your essential expense items ("needs"), those you will have to pay regardless:
everyday living costs (rent, groceries and utilities),
financial commitments (mortgages, credit card debt and car loans)
health care and insurances, and
Then list your discretionary expenses ("wants"), those things you would love to have and do but could live without:
entertainment (cable television, sports, crafts and hobbies),
luxuries (eating out, optional purchases or being pampered),
travel (both for pleasure and obligation), and
children, grandchildren and family (visits, gifts and financial help).
By putting today's dollar values on all those items, you will know the minimum (and the ideal) of how much it would cost today.
And then, because we are more aware of the impact of inflation these days, you will want to know how those costs will grow in the future.
If any of this seems complicated, you might want to find someone to help walk you through it. A financial advisor or a financial coach could be the solution.
It's essential to get this right.
Identifying income sources
Next, review the nature of the retirement income sources you have. A pension might pay out until your death. Your Social Security pays over your lifetime and adjusts somewhat for inflation. (Don't forget your spousal benefits if you are an ex-spouse or widow.) Your 401(k)s, IRAs, annuities, rental real estate and other investments may fluctuate with time and face being depleted through your spending. Lastly, you'll need to know if your income sources will be taxed.
Then you'll want to estimate their value at your time of retirement. The ideal structure is to have lifetime income sources that easily cover your essential expenses, safe from market losses. Your riskier assets can fund your discretionary expenses, which you could go without if necessary.
Again, you might want to seek help assessing how prepared you are to meet your retirement needs. If there is a gap and you are in pre-retirement, you may want to:
delay retirement or work after retiring,
increase how much your investments are earning,
find new retirement income sources, or
reduce your spending plan during retirement.
Ongoing financial management
Retirement finances are not a case of "set it and forget it." You will have to monitor your assets carefully and manage your resources to stay within the guidelines you set in your retirement plan. You will want to:
Review your investment portfolio regularly and make adjustments if its value strays too far outside your projections.
Reallocate funds from volatile investments to guaranteed income streams as needed.
Spend smartly, especially if the market drops in the early years. It's hard to recuperate if you take out too much early on and can't benefit from a later market upswing.
Consider taxes when deciding which assets to spend first, and remember to take Required Minimum Distributions (RMDs) starting at age 72. Use taxable sources when your tax rates are low and non-taxable ones in years when your tax rates are high.
No one said retirement planning – pre-retirement and after retirement – would be simple. But the benefit of having "the funds you need for as long as you need them" is worth the effort. So do not hesitate to ask for help from a financial professional if you feel it is necessary.
Bill Harris is a Retirement Management Advisor(RMA), a CERTIFIED FINANCIAL PLANNER practitioner (CFP), a Master Elite Ed Slott Advisor, and author of'Inheriting Your Spouse's IRA'. He ispresident of WH Cornerstone Investments, a financial advisory firm located in Kingston, Massachusetts. Learn more at whcornerstone.com.