How Much Guaranteed Income Do You Need? Creating Retirement Income.Submitted by Reby Advisors on June 29th, 2018
By Bob Reby, CFP®
The following is an excerpt from Chapter 7: How to Avoid Outliving Your Assets, from Bob Reby's new book Wealth Redefined: Charting the Way to Personal and Financial Freedom.
Of the many statistics I can share about how the market has always risen over time, nothing calms nerves quite like guaranteed income. If you can rely on a check hitting your mailbox every month that will pay your bills for you, you’ll be more comfortable in every aspect of your financial life. And you’ll be more likely to stomach the investing risks needed to keep pace with rising prices and taxes with your other income-producing assets.
What are your potential sources of guaranteed income?
You can start by determining exactly how much you can expect in Social Security benefits when you become eligible at SSA.gov. From there, you can access a detailed benefits estimate that is based on your actual earnings, giving you a pretty good idea of what you can expect to collect when you become eligible.
Remember, delaying your Social Security benefits is usually a smart move financially. Your guaranteed benefit goes up each year you delay, topping out at age seventy. If you wait until age seventy to begin collecting benefits, you will get monthly checks that are 32% higher than if you had started collecting at age sixty-two. The breakeven age for those who delay collecting the full eight years is around age seventy-seven, meaning even though you started getting checks eight years later than the earliest day possible, by age seventy-seven, the sum of the higher monthly payments equals what you left on the table for those eight years. After age seventy-seven, the higher monthly payments are all “profit,” and your cost-of-living adjustments each year become exponentially larger, because the percentage increases are being made on a higher dollar amount.
As mentioned earlier, and I can’t say this enough, it’s well worth it to sit down with a Social Security expert or a CERTIFIED FINANCIAL PLANNERTM to discuss the ins and outs of this valuable retirement asset. You really only have one chance to make the right decision for yourself and your family. With potential gains of six figures and beyond at stake, make sure you understand all of your options and the consequences and benefits of each.
Keep in mind, this is not only about getting more money from the government over a lifetime; it’s also about having a higher guaranteed income stream and putting less stress on your portfolio to fund your lifestyle later in life. So the planners in my office and I, as we’re helping clients plan to never run out of money, almost always recommend delaying Social Security as long as possible for these reasons.
After you have a good idea how much you can expect from Social Security, you can move on to any company pensions for which you are eligible. If you are eligible for a traditional pension, you will want to factor that into the equation and include it in your guaranteed income calculations. You will want to determine whether your pension benefit is indexed to inflation and whether or not your spouse will continue to receive a portion of the benefit in the event of your death.
Do you need more guaranteed income than you’re currently positioned to receive?
Now add up your Social Security and pensions and put that into your guaranteed income bucket. Then, compare that amount to the amount you expect to spend each year in retirement.
On an annual basis, what percentage of your portfolio is this shortfall?
Can you stomach the market volatility required to achieve the type of return needed to withdraw this amount from your portfolio each year?
Use the chart that follows as a guide to answer this question.
The chart above is for informational purposes only and is not intended as advice. All investment strategies involve risk, including the loss of capital.
What if your speed limit is too slow to live the lifestyle you want?
As a goals-based financial planner, I never like to break the news to a client or a prospect that what they've worked so hard to achieve is beyond reach. Unfortunately, that is sometimes the case. However, the earlier you start planning and running analyses like this, the better chance you have to adapt your strategies to unpleasant realities, change course, and achieve your dreams.
If the speed limit on your withdrawal rate cannot fill the gap between your guaranteed income and your lifestyle needs, or if you are uncomfortable with the level of risk you need to assume in order to raise your speed limit to the appropriate level, here are a few options to consider:
- Find ways to cut back your spending so that you need less income from withdrawals.
- Work longer to build up your nest egg and increase your income capability.
- Phase into retirement by working part-time so that you can delay or reduce withdrawals.
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