You might call it “retirement income planning,” “liquidity needs,” or perhaps “withdrawal rate.” Whatever the term, it all refers to the same thing: the cash you spend in retirement, regardless of its source—dividends, fixed-income investments, or withdrawals from retirement plans.
The Alliance for Lifetime Income’s “2024 Protected Retirement Income and Planning Study” revealed that only 27% of investors recall their financial advisers discussing secure income, despite 62% of advisers reporting that they do. Moreover, 54% of survey respondents aged 61 to 65 mistakenly believed their IRA could provide guaranteed income, and 53% thought the same about their 401(k). In reality, Social Security, pensions, and annuities are the primary sources of protected income. With pensions becoming increasingly rare and Social Security designed to cover only about 40% of pre-retirement income, retirees often face a significant gap between their income and expenses.
These misconceptions underscore why financial planners emphasize saving for retirement. With most retirements lasting about 20 years, the amount investors need to save is unbelievably daunting. This is why many seek a simple answer to questions like, “How much can I spend in retirement?” or “How much can I withdraw while making my savings last?”
Unfortunately, there’s no magic number. Retirement planning is not a “one-size-fits-all” solution. At Henssler Financial, we view it as a needs-based approach. How much you need to save and eventually withdraw should depend on how much you want to spend in retirement. Ideally, your financial adviser should take the time to analyze your current annual spending and work with you to estimate your retirement expenses. Don’t fall into the assumption that you’ll only need 80% of your current spending in retirement. If you typically spend $200,000 a year, it’s unlikely that you’ll suddenly reduce that to $160,000. Your lifestyle is ingrained, and it’s unlikely to change drastically once you retire.
At Henssler Financial, we use a cash flow projection that accounts for investment growth, annual spending, inflation, rising health care costs, taxes, and the depletion of assets by the time the youngest spouse reaches age 92. This projection provides a maximum spending limit in retirement. To ensure a high probability that your savings last your lifetime, we generally recommend spending no more than 85% of this “maximum.”
At least every two years, we revise these projections to reflect your actual spending patterns more accurately. If the projections indicate you may run out of money, the harsh reality is that you’ll need to rein in your spending. However, if you’re still 10 years from retirement, there’s time to adjust your lifestyle and increase your savings.
Once we establish your annual spending needs, we allocate 10 years’ worth of spending into laddered fixed-income investments that mature when you need the cash. This strategy shields your essential funds from stock market volatility. These “protected income” assets are typically invested in FDIC-insured CDs or U.S. Treasury bonds. The remainder of your portfolio is invested in the stock market to pursue growth.
How aggressively you’re invested depends on your capacity and willingness to take on risk, which ties directly to your asset allocation. Your cash flow projection might show that you only need a 6% return to meet your retirement goals, yet your asset allocation is designed to achieve a 10% return. While higher returns may be appealing, it’s worth asking, “Why take on extra risk if it isn’t necessary?”
If you have questions on how to begin income planning for retirement, the experts at Henssler Financial will be glad to help:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166
Listen to the November 16, 2024 “Henssler Money Talks” episode.
This article is for demonstrative and academic purposes and is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
