By PJ Shanley
Financial Planning
PJ Shanley
Some people are more afraid of running out of money in retirement than they are of dying. Planning for one’s retirement is crucial. But where do you begin?
Every client wants to know what their magic number is: how much money do they need to save for retirement? The first thing I do when I sit with my clients is create a monthly spending budget. I break their expenses into two different categories – their needs and their wants. People need food and shelter. People want to take vacations, go to nice restaurants with family and friends and spend time with their grandkids. The budget will allow us to project out how much they are going to ultimately need.
We then take a look at what retirement income sources they will have. Is there a pension? How much is their Social Security? Does the spouse have a pension? How much is the spouse’s Social Security? We also use a bucket approach, where we divide the money into short-term, mid-term and long-term dollars, and develop specific investment strategies for each bucket.
Next, we do a deep dive into their nest egg and suggest a realistic withdrawal rate so the client will not outlive their money. Monte Carlo theory suggests that a 4 percent withdrawal rate and an asset allocation of 60 percent stock/40 percent bonds gives you a 90 percent probability of not running out of money over a 20-year period. If you have a million dollars, you want to keep your annual withdrawal to $40,000 gross.
The goal is to have the guaranteed sources of income (pension, Social Security) take care of the needs and the nest egg take care of the wants.
In addition to needs and wants, there should be a “cushion” of savings that you can easily access. Having managed money through three terrible corrections in the stock market, I understand the importance of having a percentage of one’s assets in cash-equivalent investments like money market funds and certificates of deposit. Although they don’t offer much in the way of return, their value remains stable during volatile times.
The amount one should keep in cash depends on your risk tolerance. A general rule of thumb is between three months and two years of living expenses. Obviously, that number will fluctuate depending on your risk tolerance and comfort level.
Another thing to consider is the effect that inflation will have on your retirement expenses. Think about how much a gallon of gas costs today versus 25 years ago. One should assume price inflation will continue, so you need to plan accordingly.
Two of the biggest threats to retirement are rising health care and long-term care facility expenses. I strongly suggest you sit with someone who specializes in Medicare supplemental policies and someone to discuss the various options with regard to long-term care insurance.
PJ Shanley is a financial advisor with Barnum Financial Group and is a former member of the Orange Board of Finance. He can be reached at 203-513-6282 or pshanley@barnumfg.com. Securities and investment advisory services are offered through qualified registered representatives of MML Investors Services, LLC.