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Retirement Planning
Benefits of Retirement Planning
Control
You can stop working when you want to. For many, this means earlier than their peers!
Freedom
Having financial freedom means having more time for doing what you love.
Reduced Stress
Financial independence means you no longer need to worry about your job or your money.
What is Retirement Planning?
Retirement planning is a set of actions that lead to financial independence at your desired timeline.
For most, retirement means gaining financial independence. In other words, no longer needing to work. Retirement planning is a set of actions that lead to financial independence at your desired timeline.
Retirement planning consists of four primary components:
- A budget that includes both fixed and variable annual expenses that will occur in retirement. This should include a healthy margin for error.
- A strategy for building income sources that can be used in retirement. Social Security is one income source that is built automatically through payroll tax. Other sources can be built up such as a pension, rental property income, royalties, and more.
- A strategy for building your liquid net worth to the required value. This means selecting the approach retirement accounts such as 401k’s, 457’s, or IRAs, and making the appropriate amount of annual contributions. It also means selecting investments that provide a healthy total return.
- A coherent plan that coordinates your retirement income sources with your spending needs. This includes recognizing only as much income as needed so as to minimize your tax bill.
Our Approach
How Farnam Financial Approaches Retirement Planning
At Farnam, we start with the end in mind. We talk about when you’d like to be able to retire and how much you’d like to be able to spend annually. With that ballpark idea, we’ll know how much needs to be saved from your paycheck and invested every month.
Knowing that allows us to move to step two, and create a budget. We’ll start with your monthly income, then set up auto savings that allow us to reach your retirement goal. That’ll mean you can spend the rest of your paycheck without any worry or hesitation about getting behind on retirement.
The third and final step is investing. We provide investment recommendations that helping maximize your long-term return.
Each year we update your retirement plan to make sure you’re on track. With those three steps, you’ll be set up for the retirement of your dreams!
Meeting with a Retirement Financial Planner
Here are three things to expect when meeting with a retirement adviser: First, an initial discovery where the adviser will listen to your goals and concerns, and learn about your current finances including income, expenses, and assets. For this meeting, it will help to share two items: First, expected Social Security benefits. These can be found on the Social Security administration’s website under “my Social Security”. Second, your investment account statements.
Next, the retirement planner will then come back to you with a written summary of your current retirement trajectory that will help answer questions such as, “When can I retire? How much can we spend and still have what we want leftover?” The retirement adviser will also provide written recommendations that will help improve your financial future and meet your goals. Lastly, you can expect to be able to answer any questions that come to mind and have ongoing help and support when it comes to implementing the recommendations.
Frequently Asked Questions
There’s no one-size-fits-all answer. It often depends on two factors: How long you’re expecting to live, and how easily your retirement expenses can be satisfied without Social Security.
If you delay taking Social Security from age 66 to 70, you need to live past age 83 in order for it to pay off with a larger cumulative benefit.
If your retirement income sources (pension, rental income) make it such that you need to pull less than 4% of your portfolio value per year in order to fund your expenses, you may be well positioned to defer Social Security. If not taking Social Security means pulling 5%, 6%, or more from your retirement portfolio you may consider taking benefits. There’s no reason to risk overdrawing your accounts and running out of money in the future just to get a little extra Social Security.
Individuals that reach the age of 65 have a roughly 70% chance of needing some type of Long Term Care in their lifetime. This care can range from periodic in-home help to assisted living, to nursing home care. The cost of care ranges dramatically depending on the level of service. Most LTC policies have become prohibitively expensive. Self-funding can be an attractive alternative if your nest egg is large enough. To see how much various levels of care might cost in your area, click here.
There is no clear-cut answer to this question that applies in every situation. However, a great general guideline is what we call the 4% rule. The 4% rule is calculated by adding all of the investment assets that you can pull from and assuming that you will withdraw 4% each year in retirement. One key here is to adjust the amount each year to account for changes in the market, inflation, or other factors.
There’s no single correct answer. The right answer for you depends on two factors: First, how much return does your portfolio need to generate to fund required withdrawals? If it needs a higher return, a larger stock weighting makes more sense. Stocks offer a higher but variable return. If it needs just a low return, a larger bond weighting can make more sense. Bonds offer a lower but fixed return.
Second, how comfortable are you with fluctuations in your portfolio value? If 20% drops in the stock market make you uncomfortable, having a stock-heavy portfolio doesn’t make sense. Both factors of return and risk tolerance must be balanced to determine the right allocation for you.
Get in Touch Today
Contact one of our fiduciary financial planners today to learn how we can help you meet your financial goals.