Planning for retirement is one of the most significant financial goals you'll undertake. It’s not just about saving a large sum; it’s about ensuring that your money lasts throughout your retirement years.
A sustainable retirement income plan provides the financial security and peace of mind to enjoy your golden years without constantly worrying about running out of money.
Here’s five essential steps to help you create a reliable plan, with insights from Paragon Capital Management, your trusted fee-only financial advisors in Denver.
1. Assess Your Retirement Needs
The first step in building a sustainable retirement income plan is to determine your financial needs in retirement. Start by asking these key questions:
- What lifestyle do you envision for your retirement?
- How much will you need to cover basic expenses such as housing, food, and healthcare?
- What discretionary expenses, such as travel or hobbies, do you want to include?
A clear understanding of your future financial needs allows you to set realistic savings and income goals. Many financial advisors recommend estimating that you’ll need 70-80% of your pre-retirement income to maintain your lifestyle. However, this can vary based on personal circumstances.
An experienced financial advisor can help you evaluate your needs based on factors like cost of living, inflation, and your specific goals. Working with a professional ensures no critical details are overlooked.
2. Determine Your Sources of Income
Next, identify all potential income sources you’ll rely on during retirement. Common sources include:
- Social Security: Know your estimated benefits and the best age to start claiming them to maximize your income.
- Employer Pensions: If available, understand your payout options and the tax implications.
- Personal Savings and Investments: These could include IRAs, 401(k) plans, brokerage accounts, or savings accounts.
- Part-Time Work or Passive Income: Many retirees supplement their income through consulting, freelancing, or rental properties.
Each income source has its own risks and considerations. For example, Social Security benefits might not cover all your expenses, while investments can fluctuate based on market performance.
A financial advisor can help you develop a strategy to combine these sources effectively and ensure you have a steady income stream.
3. Create a Withdrawal Strategy
Once you understand your income sources, the next step is to develop a withdrawal strategy that aligns with your goals and minimizes the risk of depleting your savings. Consider these principles:
- Follow the 4% Rule: A common guideline is to withdraw 4% of your savings annually, adjusted for inflation. While not foolproof, it provides a framework to avoid overspending.
- Prioritize Tax-Efficient Withdrawals: Minimize taxes by withdrawing from taxable accounts first, followed by tax-deferred accounts like traditional IRAs, and lastly tax-free accounts like Roth IRAs.
- Adjust for Market Conditions: In years when your investments perform well, you might withdraw more. In challenging years, cutting back on withdrawals can help preserve your portfolio. The need for this kind of change can be further reduced with a properly designed portfolio allocation.
While the 4% rule works great for people while they are working and saving, it falls short when it comes time to retire. Depending on your circumstances, it can cause a retiree to underspend early in retirement when they have the best health, inclination, and desire to live life to the fullest. Our Denver-based financial advisors can help determine a more customized maximum withdrawal plan that fits your unique circumstances.
A good plan ensures your strategy adapts to changing economic conditions and personal health developments without risking leaving your older self in danger of having too little assets or leaving too much unused resources that could have brought more joy.
4. Account for Inflation and Healthcare Costs
Inflation and rising healthcare costs are two significant factors that can erode your retirement income over time. Historically, inflation has averaged around 2-3% annually, but some years may see higher rates. Meanwhile, healthcare costs tend to outpace general inflation.
To protect against these risks:
- Invest in Growth Assets: While conservative investments are essential for stability, including growth assets like equities in your portfolio can help your money keep pace with inflation.
- Consider Long-Term Care Insurance: As you age, healthcare expenses may rise significantly. Long-term care insurance can help offset these costs and protect your assets.
- Design a Portfolio that Matches your Anticipated Spending Needs: A good portfolio design in retirement will have the proper mix of investments for the timeline you expect to need the assets. By matching your liabilities (spending on life and fund) to the proper investments you can sleep at night without needing to worry about what is happening in the volatile stock market or the various scary headlines that turn out to be nothing but noise in the long run.
A financial advisor can project how inflation and healthcare costs might impact your plan and recommend ways to safeguard your retirement income.
5. Review and Adjust Your Plan Regularly
Retirement planning is not a one-time event. Your financial situation, goals, and external factors like market conditions will evolve over time. Regularly reviewing your plan ensures it remains aligned with your needs.
Here’s what to monitor:
- Investment Performance: Ensure your portfolio remains diversified and aligned with your risk tolerance.
- Spending Patterns: Track your expenses to avoid overspending.
- Changes in Legislation: Tax laws, Social Security policies, and other regulations may affect your plan.
- Life Events: Marriage, divorce, health changes, or family needs may require adjustments.
By partnering with a knowledgeable financial advisor, you can stay proactive and make necessary adjustments to keep your retirement income plan sustainable.
Why Choose a Fee-Only Financial Advisor?
At Paragon Capital Management, we believe that fee-only financial planning is the best way to ensure your interests come first. As fee-only advisors, we don’t earn commissions from selling financial products. Our goal is to provide objective, personalized advice tailored to your retirement needs.
Located in Denver, we’re deeply familiar with the unique financial challenges and opportunities in this region. Whether you’re navigating Social Security, managing investments, or planning for healthcare costs, we’re here to guide you every step of the way.
Final Thoughts
Creating a sustainable retirement income plan requires careful planning, ongoing adjustments, and professional guidance. By assessing your needs, diversifying your income sources, developing a withdrawal strategy, accounting for inflation, and regularly reviewing your plan, you can enjoy financial security and peace of mind during retirement.
If you’re ready to take the next step, reach out to Paragon Capital Management, your trusted fee-only financial advisors in Denver. Let’s work together to create a retirement plan that supports your dreams and provides lasting financial stability.