by Jamie P. Hopkins, ESQ., CFP®, LLM, CLU®, ChFC®, RICP®
Regardless of how far off you are from retirement, there’s one main goal your planning should be working toward: saving enough so that you don’t outlive your money.
But there’s no exact science for figuring out exactly how much money you’ll need to accomplish that goal. The reality is there is no magic retirement savings number, it depends on your circumstances. That’s why a good retirement plan will be prepared for the certainty of today, as well as the uncertainty of tomorrow.
I often compare retirement planning to trying to hit a moving target in the wind.
The target is our goals, our individual desires – what do you want to accomplish in retirement? The target is moving because we don’t know our life expectancy – so how can we know how long our money needs to last? And the wind is all the factors that might change on the way to and in retirement – say, the need for long-term care or legislative changes to Social Security.
In this article, I’ll cover the main factors you need to consider as you approach retirement, as well as the steps you should be taking 10 years, five years and one year before you retire.
Planning for Uncertainty
Obviously, you can’t be prepared for every curveball that might come your way before and during retirement, but there are some “certain” uncertainties you can guard against. I like to call these the known unknowns.
One of these uncertainties is legislative changes. Though major legislation doesn’t come out of Washington at the fastest rate, when it does happen, it can bring major changes to programs like Social Security and Medicare as well as to other areas of retirement planning. The reality is that laws will change and we have to understand that is a part of the legislative process.
During the Trump administration, the Tax Cuts and Jobs Act and the SECURE Act brought major changes to tax planning, estate planning and more. And though it’s been stalled for months, we could soon see another push by the Biden administration to pass Build Back Better Act – though possibly under a different name and with different provisions than what we saw in 2021. And there’s still the possibility we could see the SECURE Act 2.0 before the end of the year, as it has passed in the House with a 414-5 vote in its favor and moved to the Senate.
You also need to be aware of outside factors that can influence the markets. Just in the past couple of years, we’ve seen the COVID-19 pandemic and, more recently, Russia’s invasion of Ukraine lead to stock market volatility, inflation and supply chain issues.
That’s why it’s important to have a solid retirement plan in place, so that you can withstand and adjust to these unexpected changes and events.
Not Outliving Your Money
When we think about the risks we face in retirement, our own longevity probably isn’t one that comes to mind. Though it’s not exactly right to call this a risk – who doesn’t want to live longer? – it can exacerbate other risks you might face in retirement.
The longer you live, the more likely you are to face some kind of risk that could affect your retirement – say, rising inflation or a market downturn that would impact your savings. The longer our retirement is going to be, the bigger risk we have that inflation could reduce our purchasing power.
And many people who make it through a long and successful retirement will still end up needing significant long-term care at some point, which can incur significant expenses. There are no easy and cheap ways to plan for long-term care, but there are some options to consider.
You can keep savings in your own portfolio to cover these expenditures, or set aside assets or income from sources like Social Security, your home or a pension. Another option is insurance, either with a standalone policy or a hybrid life insurance/long-term care policy.
[Read more: Yes, You Can Make a Solid Long-Term Care Plan. Here’s How and Why It’s Important]
Whatever you choose to do, remember that Medicare isn’t really an option, since it wasn’t designed to cover long-term care – though Medicaid does in some circumstances.
There’s No ‘Magic Number’
If you knew you had just enough retirement savings to cover all your expenses through the end of your life but would have nothing left over, would you take that tradeoff?
A lot of people likely would – you’d live very comfortably in retirement, though you’d have nothing to pass on to the next generations of your family.
Despite this thought experiment, there’s no “magic number” to save for that accomplishes this. Even if you feel sure when you retire that you won’t outlive your money, not having enough saved isn’t a problem that becomes apparent until you’re well into retirement. That being said, you can use something like the 4% withdrawal rate to get a ballpark of what you might be able to spend in retirement and what you need to save.
For example, let’s say you determine you need $60,000 a year in retirement, and five years from retirement you have $1 million saved . Withdrawing 4% from that $1 million gives you $40,000 a year, adjusted for inflation, to spend for 30 years if you can maintain that level of savings until retirement. Now add in income from Social Security and other sources in retirement, and you’re likely close to your spending goal.
Things won’t always work out that neatly, though. However, if you flip the 4% withdrawal rate on its head, it implies that you need to save 25x what you want to spend in retirement. So what can you do ahead of time to maximize your chances of success? Let’s take a look at steps you should take 10 years, five years and one year from retirement.
10 Years from Retirement
You’ve likely been putting money in a retirement account like a 401(k) or IRA throughout your working life (do not feel bad if you have not been), but this is the point where you should begin getting more granular about retirement income planning. You need to shift your focus from accumulation and savings to spending, expenses, and what you can maintain through retirement. Your life has so far been about saving your income, now you need to start thinking about turning your savings into income.
Start getting a clearer picture about what kind of spending you’re going to have in retirement and the lifestyle you want to live – are you planning a lot of travel, or do you want to buy a new home and relocate?
Once you crunch the numbers, you may find you’re on track to achieve the spending level you want in retirement. Or you may find that you’re short of your goal. Either way, you can still get a lot done in this time period. People often overestimate what they can accomplish in one year, but underestimate what they can get done in 10 years.
That makes this 10-years-out period the ideal time to focus on tax planning and reducing your tax bill in retirement. Taxes are likely to be one of your biggest expenses in retirement, so we want to minimize them as much as possible.
One way to do this is by planning for Roth conversions early in retirement and in lower-income years when you start to scale down your work, which can reduce the amount of required minimum distributions from your retirement accounts. Qualified charitable distributions, bunching strategies and college education planning strategies are other tools at your disposal to lower your tax bill in retirement.
You should also think about diversification of your taxes and taxable investments so that you have assets in after-tax accounts like a Roth IRA, to minimize the risk you face from future changes to tax rates.
But ten years before retirement you still have time to save and plan. Start thinking about savings, income, and how long you can work.
[Read more: Tax Planning in Retirement: Strategies to Minimize Taxes When You Retire
5 Years from Retirement
Once you’re five years out from retirement, you’ll be entering one of the riskiest periods of your retirement planning – lasting until five years into retirement. If you get bad market returns or your portfolio suffers a loss right before or just into retirement, you could have to take withdrawals from that portfolio early in retirement, which could deplete your funds sooner than expected.
As such, a big decision as you near retirement is what is the right investable asset mix that you have in your retirement savings portfolio. Asset allocation, your mix of stocks, bonds, and fixed-income sources, play a crucial role in retirement.
That makes five years from retirement a good time to do a retirement income needs analysis by figuring out what you’ll need to spend and what income you’ll have at your disposal. If you realize you might be short of your goals, there are steps you can take to try to mitigate that shortfall.
One strategy is to take on more risk in your investment portfolio to try to bridge that income shortfall, though this carries obvious downsides. You could also look at replacing certain investments with other types that might carry a similar risk but provide better retirement income solutions. For instance, you could replace part of your bond portfolio with an annuity or some other fixed income source to move up the return.
Another option could be to get more precise about where your income will come from in retirement. Some people engage in bucketing, a style of retirement income planning that aligns assets and income to timeframes. So you might set aside a bond ladder for the first five years of retirement and leave your market assets for use 10 years or more out in retirement.
You could also consider boosting your savings by delaying retirement and working longer. Though delaying retirement might not sound very appealing, a little can go a long way with this strategy – working just one year longer can result in two to three years of retirement spending.
If delaying retirement isn’t for you, other solutions include deferring Social Security to improve your inflation-adjusted income throughout retirement, downsizing your home, moving to a state with lower taxes or trimming back your retirement travel plans.
1 Year from Retirement
Though your plan is mostly set in stone at this point, there’s still plenty you can do to solidify and refine it. However, there are also things to avoid so you don’t blow up your plan.
With one year to go until retirement, now is the time to start executing rollovers and exchanges. The idea here is that it is time to simplify. If you’re moving properties, you’ll want to be sure that they’re properly titled, that they’re in the right place if they’re part of your estate plan and that you have the right beneficiaries designated.
You also want to consider what impact your heirs and loved ones will face from a liquidity and tax standpoint when you pass away, and do the most efficient planning possible so that you leave them in a good place. Estate plans often change a bit once you retire.
In addition to all your planning, this is also when you should start considering how you’ll phase into retirement. I often see people, once they retire, move or relocate but not find the satisfaction that they were looking for. With a year to go before retirement, you have some time to “test out” what your life will be like once you stop working and make adjustments if you find it’s not exactly what you expected.
One way to blow up your retirement is to retire too soon, without a plan on where you will live, how you will spend your time, and where you will find meaning. The non-financial aspects of retirement, like enjoying life and spending time with family and friends, is just as important as the financial side.
Once you’ve retired, there’s still some regular “maintenance” that needs to be done on your plan. This includes ensuring your estate documents are up to date, determining if you need a trust in place, making sure your beneficiary designations match current laws and reviewing your life insurance policy.
[Read more: Knowing When to Update Your Estate Plan]
Live By Design, Not By Default
Ultimately, retirement planning isn’t just about planning for a good life – it’s about planning for a good end of life. It’s also about the legacy you’ll leave behind, to your spouse, your children and your grandchildren.
With proper planning, you can help ensure that once you’ve retired, you’ll be living life by design, not by default. Money shouldn’t dictate the kind of life you’ll live in retirement. Instead, you should have enough money to live the life you want.
Make sure you’re on the right path toward retirement by scheduling a visit with your financial professional.
Converting from a traditional IRA to a Roth IRA is a taxable event.
Jamie is not affiliated or registered with Cetera Advisor Networks LLC. Any information provided by Jamie is in no way related to Cetera Advisor Networks LLC or its registered representatives. Jamie is not registered with CWM, LLC as an investment advisor representative and does not provide product recommendations or investment advice.