Retirement Planning in Uncertain Times: Do I have enough? 6 Things to Consider

Uncertain times don’t have to bring uncertainty to your retirement planning. Staying intentional about your preparation for retirement in the face of short-term market volatility will go a long way in helping you achieve financial security and peace of mind as you prepare for and transition into your “Golden Years.”

When trying to answer the question, “do I have enough to retire?” we recommend focusing on 6 important considerations.

Consideration #1: Take All Anticipated Expenses into Account

Analyze the expenses you’ll encounter after your retirement. We group our clients’ expenses into 4 distinct categories:

Non-discretionary: Fixed-type expenses that are required for general living. These include housing costs, insurance, gas, groceries, utilities, etc.
Discretionary: Fun type expenses, but optional, expenses like entertainment, travel, and hobbies. These can be cut if needed, but you’ll likely want to indulge when the margin is there.
Extraordinary: Big-ticket expenses that are typically a one-time purchase. This would include a new car, a boat, a trip, a unique experience, etc.
Taxes: This breaks down into two major categories: income and property taxes. The amount you’ll owe for annual income tax could differ significantly from what was required pre-retirement. We utilize sophisticated tax planning software to accurately model our clients’ anticipated taxes in retirement, running multi-year tax projections for their retirement years so they know what to expect.

Accurately projecting these expenses in retirement is a foundational element of answering the “do I have enough” to retire question.

Consideration #2: Understand All Sources of Potential Retirement Income

While your portfolio is likely an essential source of your income during retirement, you also need to consider things like social security, pension income, rental income, royalty income, and small business income in your retirement planning.

If you anticipate other sources of income outside of your portfolio, subtract these from your total annual expenses in retirement (the total of the four expense categories above). The result is the income you’ll need from your portfolio to meet your needs.

Once you have identified the amount of annual income needed from your investment portfolio, determine if you have saved enough and have a portfolio size large enough to sustain these anticipated annual portfolio withdrawals. To do that, a good rule of thumb is multiplying your required annual income from the portfolio by 25.

For example, if you need $200,000 a year from your portfolio to meet your lifestyle needs in retirement, your portfolio must sit around $5M when you retire ($200,000 x 25).

This aligns with the widely known 4% withdrawal rate rule of thumb. If you keep your annual portfolio withdrawal rate at 4% or below in retirement (assuming your portfolio is invested appropriately with proper diversification), you should be able to maintain your portfolio principal over a long retirement without the risk of depleting the principal base.

While these rules of thumbs are helpful in putting you in the ballpark of answering the question of whether you have saved enough to retire, we take a more sophisticated approach for our clients via our Lifestyle Protection Analysis™ (LPA). Utilizing robust modeling software, we are able to stress test our client financial plans utilizing actual historical market data, to see how their cashflows and portfolios hold up even in the face of some of the worst stock market conditions we’ve faced in the past.

Consideration #3: Determine Income Source Reliability

It’s important to remember that not all income sources are equal in their reliability.

Social Security and large, stable corporate pension plans are at the very top of the reliability scale. However, other sources of income like rental, royalty, or small business income might be less reliable for your retirement planning needs, especially in uncertain and volatile economic times.

When determining your portfolio income needs in retirement, and thus the size of the portfolio you need to have before retiring, consider the adverse scenarios that could negatively impact your sources of income. Ask yourself the hard questions, such as:

What if my rental property goes unrented for 6 months or a year?
What if rents decline?
What if the royalty income from my book or patent starts to decline?
What if my residual small business income starts to dry up?
How does that change the income I need from my portfolio and how much I need to save before retiring?

Similarly, thinking about what happens to your Social Security and pension income if you or your spouse dies prematurely is vital. In that scenario, instead of receiving two Social Security incomes, the surviving spouse will receive only the higher of the two.

Also, depending on the payout option selected on a corporate or government pension, the surviving spouse could see this pension income vanish entirely or reduced substantially after the death of the pensioner.

That is why you should consider the following as well:

How would premature death impact the retirement savings needed to sustain the necessary income for the surviving spouse?
Is there any life insurance for the pensioner to help fill this potential gap?
Or do we need to keep saving and delay retirement until we have a large-enough portfolio to protect against this risk?

Thinking through worst-case scenarios and creating additional margins is never comfortable but is very important to ensure you maintain financial strength in your retirement years regardless of what happens. This an important part of the ongoing Lifestyle Protection Analysis™ (LPA) we do for our clients, stress testing their retirement planning under untimely death and other adverse scenarios.

Consideration #4: Determine the Makeup of Your Balance Sheet

It’s not just the bottom line cashflow that needs to be accounted for in your retirement planning: You should examine the type of assets and type of accounts that make up your withdrawable portfolio.

Think of this in terms of highly liquid assets (cash or cash-like vehicles), semi-liquid (marketable/tradeable securities) in taxable non-retirement brokerage accounts, tax free Roth retirement assets, and traditional tax-deferred retirement assets (IRAs, 401(k)s, and 403(b)s).

How your assets are allocated will significantly impact your tax exposure in retirement and your flexibility to handle extraordinary and unexpected expenses. That is why tax diversification across your accounts is essential.

Suppose too much of your portfolio is in traditional qualified retirement plans. If that’s the case, your tax expense in retirement is going to be higher than if you have non-retirement assets to withdraw upon until you are forced to start taking withdrawals from your qualified retirement accounts at age 73 (known as Required Minimum Distributions, or RMDs). This is because any withdrawals from traditional qualified retirement plans are taxed as ordinary income, likely at higher rates, than selling securities and withdrawing from a taxable brokerage account(s) at lower capital gains rates.

Additionally, consider if you have too much of your balance sheet in non-liquid assets, like real estate or a business, that doesn’t generate enough income to meet your retirement needs. This can be a real problem, especially if unexpected expenses arise.

If this is the case, selling these assets and placing the cash in more liquid investments that you can withdraw from in retirement might make the most sense.

Consideration #5: Proper Portfolio Diversification

Perhaps you already have enough saved after you multiply your desired annual retirement income by 25. But if your portfolio isn’t diversified, unexpected significant drops in the market may greatly impact your ability to retire or your income in retirement.

Investing in a globally diverse, low-cost portfolio is vital to systematically growing your portfolio over the 4% withdrawal target, while minimizing volatility in down markets and ensuring the sustainability of your retirement nest egg over many years in retirement. That means having an appropriate balance between stocks and bonds and domestic and international exposure, for maximum protection against sudden market swings when systematic withdrawals are being taken to sustain your retirement lifestyle.

As investors approach retirement, the inclination can be to become too conservative with their investment portfolio, maybe even exiting the markets entirely. This can have dangerous consequences depending on their withdrawal needs and inflation. We typically recommend our retired clients keep approximately one year’s worth of their expenses in cash (or a high yielding, liquid money market fund) when in retirement, and then invest the rest of their portfolio in a globally diversified way commensurate with their long-term financial objectives and risk tolerance.

Then as market conditions shift, rebalancing your portfolio is important to maintain this desired long-term return and risk profile. This involves selling/trimming assets that have become overweighted while also buying/bolstering underweight assets that may have underperformed and may be selling at a discount. Staying disciplined to your investment plan and asset allocation targets will be key to your long-term investing success.

Consideration #6: Go it Alone or Get Professional Help from a Fiduciary Advisor

We like to call the 5 years before retirement to the 5 years after retirement the “decision zone” or “transition stage.” This is a time when you will undoubtedly face a number of significant financial decisions, some of which are irreversible. Ask yourself, are you equipped to make these decisions yourself? Can you be objective, unemotional, and disciplined in the face of some things you can’t control, like market volatility? Do you have the time, energy, and talent to successfully navigate this transition stage with confidence and peace of mind? If the answer to any of these questions is “no,” you should consider partnering with a fee-only, fiduciary advisor, like Janiczek Wealth Management, someone who can honestly and objectively assess your situation, provide ongoing leadership and perspective, so that you are continually equipped to make the best possible financial decisions you can during this incredibly important time in your life.

Janiczek Wealth Management is a 36-Time Top Ranked Financial Advisor, headquartered in Denver for over 30 years, specializing in successfully helping high net worth clients ($1 million to $20 million investment portfolios) and ultra-high net worth clients ($20 million to $100 million or more investment portfolios) flourish in retirement. Our proprietary systems, processes, and overall client experience optimize all facets of our clients’ financial lives to include investment management, tax planning, retirement/cashflow planning, risk management, philanthropic and estate planning.

Is retirement on the horizon for you? Are you interested in help with your retirement plan, or a second opinion on your portfolio with retirement in mind? Speak with an advisor at Janiczek Wealth Management today by completing our contact form or by calling/emailing Cathy Wegner, Director of New Client Engagements, at 303-339-4480 or cwegner@janiczek.com.