Are Your Retirement Benefits Enough? Ask Yourself These 3 Questions

One of the chief fears many Americans have about retirement is not having enough to live on or running out of money at the end of life – 46 percent of non-retired people worry that they won’t have enough money to live comfortably when they retire. 

With a higher cost of living in California opposed to other states, many of our clients have the same concerns, and in Sonoma County, retirement benefits may not be enough if you haven’t properly prepared. 

How can you find out whether your benefits will be enough to live comfortably in retirement and achieve your goals? The answer is a step-by-step process, combining your income streams, desired lifestyle, goals in retirement and individual needs in retirement, such as healthcare and real estate.

While financial planning is different for everyone, some of the same questions should be addressed by all. If you’re not sure of the answers, it can be widely beneficial to talk with a financial advisor

It’s never too early to start planning for your future. Contact Montgomery Taylor Wealth Management and schedule a free, no-strings-attached conversation to see how we can help. 

How Can You Leverage Social Security Benefits?

If you think Social Security benefits are one-size-fits-all, think again. The receipt and amount of Social Security benefits depends on your earnings history as well as what age you begin to draw them.

People become eligible for their full retirement benefits at their full retirement age, which depends on your birth year. (You can look up what that age is for you here.) It is currently 67 for people born in 1960 and later. 

People can elect to begin Social Security benefits between the age of 62 and their full retirement age, but your full retirement benefits are reduced by between 20 and 30 percent if you start taking them early. 

On the other hand, you can increase your Social Security payout above what you’d get at your full retirement age by working longer than that “magic age.” For every year you continue to work between your full retirement age and age 70, the amount increases about 8 percent. Once you reach age 70, there are no additional increases. 

How Will Your Other Benefits Pay Out?

At one point, most people retired with Social Security and a pension. That’s no longer the case. Retirement plans like 401(k)s and Individual Retirement Accounts (IRAs) are now more common than pensions. You may also have other potential income streams in retirement, such as annuities or dividends and withdrawals from investments.

It’s prudent to work with a financial advisor to manage your benefits in retirement. The withdrawals are subject to multiple laws and regulations from the IRS that can affect your overall benefits and your taxes. Most folks are mandated to start taking Required Minimum Distributions (RMDs) from tax-advantaged retirement accounts at the age of 70-½, for instance – and if they don’t, the IRS can levy steep taxes.

When you do start to withdraw from tax-advantaged retirement accounts, the amount is determined by your estimated lifespan and distribution factors. The calculations can be complex, so working with a financial advisor can help maximize your benefits, ensure you’re complying with the regulations, and minimize taxes and other risks. 

What Costs Do You Need to Consider in Retirement?

While it’s all well and good to think about your income in retirement, you also need to think about your expenses! It’s likely you’ll need about 80 percent of your pre-retirement income in retirement. 

While some costs, such as commuting to work, may decrease, others, such as travel or healthcare, may increase. You may travel more with more leisure time; older people are more subject to chronic conditions and other health concerns than younger folks. 

Here’s a brief review of costs and other factors that affect expenses and income in retirement:

Healthcare 

Health insurance coverage requires payment of premiums, deductibles and copays. There’s a widespread belief that Medicare, the government health insurance open to most Americans at the age of 65, is free. It isn’t. Medicare requires payment of these costs, just as regular health insurance does. 

In addition, it may be prudent to consider additional coverage, either Medigap plans or Medicare Advantage plans, which offer broader coverage. They also require payment of premiums, and may require deductibles and copays.

The cost of health care is also rising very steeply, and senior citizens are far from immune to these increases. 

If you’re not sure what healthcare will cost you, a financial advisor can help you plan, factoring in the likelihood of inflation. You should also consider your state of health.

Housing costs

Real estate costs are a large part of every American’s budget. That changes in retirement only if you have a paid-off mortgage and plan to stay in the home you own. Even in that case, though, don’t neglect planning for applicable property and other taxes as well as maintenance and upkeep costs.

Many Americans, of course, move in retirement. Some downsize because their homes are now too big for their lifestyle or to save on mortgage or rent. Others move to sunny areas or to be closer to grandchildren.

The bottom line: The cost(s) of real estate, including rentals, mortgages and taxes, varies enormously around the country. Whether you plan to move or stay put, be sure to calculate your likely expenses.

Your plans for retirement

Your plans for retirement affect both your income and your expenses. Think long and hard about your goals and what you want to achieve. Do you want to travel? Finally start a small business? An increasing number of Americans are electing to work in the retirement years. Will you be one of them?

Be sure to calculate your taxes on income if you plan to work. Map out likely expenses if you plan to travel or cultivate other leisure time activities.

Your expected longevity

When wondering if in Sonoma County, retirement benefits will be enough to cover your life in retirement, you need to consider how long that life will likely be. The average lifespan is now 78.6 years. And remember, while you will want your money to last throughout your life, you may also want to leave some behind when you’re gone. It can be difficult to think about your death, but if you want to leave money to your heirs in an estate plan, it’s important. 

A financial advisor can help you target annual withdrawals to help ensure that your savings last, and develop an estate plan, creating powers of attorney to manage both your health and your assets should you become incapacitated late in life.