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Investors today face a pressing question: Will I have enough money for retirement?
Research shows that prospective retirees may have a large lump sum in mind.
For a more accurate personal metric, it helps to start with your planned spending, said Christine Benz, director of personal finance and retirement planning at Morningstar, on Thursday’s CNBC Your Money event.
Benz is also the author of the book “How to Retire: 20 Lessons for a Happy, Successful, and Wealthy Retirement.”
To better understand what your retirement income will look like, Benz says it helps to consider the answers to a few questions.
1. Can you live on 4% of your portfolio?
One of the best rules of thumb for financial planning, the 4% rule, has been around for decades.
The idea is that retirees can withdraw 4% from their investment portfolio in the first year of retirement and then adjust the withdrawal annually for inflation.
Whether that gauge is the best one is hotly debated among financial planning experts.
It’s a great place to start understanding what your retirement income will look like, Benz explained.
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Let’s start by aggregating assets other than your portfolio. For many people, this also includes Social Security retirement benefits. For others, it may include income from other assets such as pensions or real estate.
After calculating that total, evaluate how much 4% of your portfolio adds to these income sources.
“This is a good formula to gauge yourself against when determining if you’re fit enough to retire,” Benz said.
2. When should I claim Social Security benefits?
Many retirees rely on Social Security benefits as an important source of retirement income.
And research shows that many people are concerned that the program won’t provide them with the funds they expect in retirement. Social Security’s Retirement Trust Fund currently faces a depletion deadline of 2033, at which point some projections suggest 79% of benefits could be paid out unless Congress takes action.
If you’re 60 or older, you probably won’t see any major changes to the program between now and when you claim benefits, Bentz said.
Eligibility for retirement benefits begins at age 62, but it’s still worth waiting if possible, she says.
When you reach full retirement age (66 to 67, depending on your year of birth), you can collect 100% of the benefits you’ve earned.
But if you delay your full retirement age until age 70, you could receive about 8% more per year, Benz said.
Certainly, if you’re married, you may want to coordinate with your spouse to adjust your claim decision and also take other personal factors into account, such as life expectancy.
3. How will I withdraw my money after retirement?
One reason why retirement is such a big change is that workers go from receiving a regular paycheck to having to earn an income in a large lump sum.
Before your retirement date, it’s helpful to think carefully about how you’ll withdraw your funds, Benz says.
Benz prefers a bucket strategy so that you can allocate your funds to immediate, short-term, and long-term needs.
Having portfolio withdrawals available in safer assets for at least a few years protects retirees from sequence of return risks where withdrawals of declining investments could negatively impact the portfolio. can. This could include a combination of allocations that hold up during stock market declines, such as cash, short-term and intermediate-term bonds, Benz said.
Long-term assets are likely to be invested more aggressively in stocks for growth in retirement, as well as assets that may be passed on to your heirs in the future. Benz said Roth accounts are ideal for these assets because they provide tax-free income in retirement and limit the amount of taxes heirs pay on their inheritance.
