Can you afford to retire? The pandemic has pushed many people to confront this question earlier than they may have planned. The answer may be more complicated than you think and an incorrect answer could be costly. To correctly answer the question, it may help to build a retirement income and expenses pyramid.
Longevity risk is one reason that the answer is complicated. Many people retiring today live twenty-five years or longer after they retire; think of that as being unemployed for 25 years. In addition, that twenty-five-year period is filled with three different phases with different sets of expenses: the Go-Go years, the Slow-Go years and the No-Go years. Another complication is that your lifestyle when you retire may be totally different, with a different set of expenses; it’s a whole new budget. Finally, your sources of income are likely to be different and subject to new sets of risks.
On Wednesday, October 29th from noon to 1:30 p.m. Susan Moore of Moore Wealth Management, Inc. will be conducting a complimentary webinar that covers how to build your pyramid, estimating what your income and expenses will be during retirement. There will be both a live and recorded version. Please call the Moore Wealth Management office for further information or reservations at 256.234.2761 or email sarah@moorewealthmanagement.com. If you miss the webinar, we also offer free consultations that are without obligation.
A pyramid approach attempts to prioritize the sources of income and expenses. First, you build the foundation of the pyramid with your guaranteed sources of income which include Social Security, some types of annuities and pensions. This involves a whole set of questions: when to take Social Security to maximize it for your circumstances; when and how to take income from the annuities; and which pension option to take and is your pension safe (is it at risk because of underfunding)?
Once you’ve determined the guaranteed sources of income that make up the foundation, then you have to budget and figure out your essential expenses, which include food, housing, healthcare and taxes. These expenses may vary widely in the three phases of Go-Go, Slow-Go and No-Go. This too involves a whole set of questions: how to maximize your healthcare coverage and minimize your costs; can you afford to age in place or do you need to plan to downsize into independent or assisted living options; and how to minimize taxes on Social Security and avoid higher Medicare premiums.
Then you build the middle level of the pyramid which includes your variable sources of income from savings and investment portfolios and your desired expenses like vacations, hobbies, entertainment and taking care of family. Like the essential expenses, these may vary widely depending up on the three phases. A portfolio producing an income is subject to different risks than one in which you are accumulating assets. Conventional wisdom was that a safe withdrawal rate from a portfolio was 4%; new studies show that in a low interest rate world the “new” safe withdrawal rate is 2.5% to 3%.¹ In addition, a portfolio producing an income is subject to greater risks of sustained losses than a portfolio providing no distributions.
Finally, you are ready to build the top of the pyramid which include your legacy plans: helping to fund grandchildren’s education, gifts to family while you’re alive and at your death; and philanthropic giving while you’re alive and at your death. These should be funded with your longer-term holdings or illiquid investments.
Retiring is complicated. The old adage applies: if you fail to plan, you plan to fail. Build your pyramid!
Susan Clayton Moore, J.D., is a financial advisor and wealth manager of Moore Wealth Management, Inc., with offices Montgomery and Alexander City, AL. Susan has over $150 million in assets (as of 9.1.24) under management through Kestra Financial and has been a financial planner for over 40 years. Contact Susan at 256.234.2761. Email contact is susan@moorewealthmanagement.com.
The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney or tax advisor regarding your individual situation. Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment Advisory Services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. Kestra IS or Kestra AS are not affiliated with Moore Wealth Management, Inc. https://www.kestrafinancial.com/disclosures