In this week’s blog post, we are excited to share insights from our latest interview with Jason Parker, author of the highly acclaimed book Sound Retirement Planning, and founder of the Retirement Budget Calculator. Jason shares his insights on retirement planning and provides actionable advice for those looking to plan for their retirement.
Our topic for today focuses on various questions such as what would be a sound retirement planning strategy and whether It is essential to plan ahead and determine how much money you need to retire comfortably. It is also important to consider the purpose of your money and how you want to use it in retirement.
What is Retirement Plan About
Too many people focus solely on investments and rates of return when, in reality, retirement planning is all about cash flow. It’s all about making sure you have enough income to meet all of your expenses. Three things that people should be having during retirement are clarity, confidence, and freedom. Having clarity will help them to know what is most important in life. Having confidence in their financial situation will give them assurance that their numbers are going to work. Lastly, having the freedom to not worry about money will provide them with the ability to live their best life. That is the ultimate goal of retirement.
What is Good Retirement Planning Strategy?
For those starting out on their Retirement plan at younger ages, the best advice is to save as much as possible, keep fees as low as possible, and invest aggressively. Taking risks is important at this stage, as you have a lot of time to make up for any losses. For those getting ready to make the transition into retirement, however, it’s all about cash flow. Understand how much you spend, consider your family history, and know how much money you have saved. Once these three pieces are organized, you can back into the numbers to understand if you have saved enough to retire comfortably. Retirement is one of the biggest financial decisions you will ever make in your life, so it is important to do your due diligence and make sure that this is the right decision for you by asking the right questions for yourself.
The Three Layers of Pension Funds
Many countries have traditionally had a three-legged pension stool, consisting of social security, corporate pensions, and personal savings. In the United States, however, pensions have been phased out in many instances, leaving many people with only two pillars of support — social security and personal savings. To ensure a secure retirement, these individuals may need to consider purchasing a guaranteed income product to supplement their income.
How Much Do You Need To Retire?
Everyone wants to know if they have saved enough for retirement. To answer this question, one must understand how much they spend annually, as well as how much they can expect in Social Security benefits. The 4% rule is often used as a rule of thumb: multiply your annual expenses by 25 to determine if you have saved enough. However, this is based on the assumption that 60% of your savings are in equities and 40% are in fixed income, and that future investment will perform similarly to past investments. To really determine if you have saved enough for retirement, it is best to build a spreadsheet that accounts for expenses, inflation, volatility, and rate of return. This can be complicated, which is why it is best to use software designed to make the process easier. Simply plug in your numbers, and you will be able to see the results.
How Can Average People Rely On Their Investments?
Jason mentions that compound interest is the eighth wonder of the world. Those who understand it can benefit from it, while those who fail to pay attention may suffer the consequences. Recently, there has been a lot of noise about the pension crisis in countries such as the UK and Europe. Just last month, a major pension fund was nearly at risk of going bust, but due to changes in the government, it was avoided. In addition, some pension funds are investing their money in more alternative spaces, leading to uncertainty over where people’s money is going. It’s possible that some of these funds have been diverted to crypto exchanges. On top of that, even the standard 60/40 bond stocks portfolio has had its worst year in history.
It’s been indeed a tough year for the market, however, when it comes to being an investor you have to think in decades, not days. Volatility is very normal for the stock market, so the one thing to advise those transitioning into retirement is that time is the cure to the volatility of the stock market. The more time you have, the more risk you can afford to take and this is especially important when it comes to the sequence of return risk. History will likely look back at 2022 as a bad year to retire. In general, an annuity contract from an insurance company, with a cost of living adjustment, is the only way to guarantee income for the rest of your life. However, it is important to do your due diligence to ensure the company is strong and reliable. For some people, Social Security and a pension may be enough to cover the 80% benchmark. Ultimately, it is important to evaluate your own personal situation to determine if more guaranteed income is necessary.
Misconceptions Around Pension
One of the biggest mistakes people make is they assume too high of a rate of return and assume that the rate of return will be constant. In the pension industry, there is not enough emphasis put on liability, which in retirement is your cash flow, budget, and spending. That is why there are developed calculators to help people get out of this mindset and focus on their spending first. It is the most important number in a good retirement plan, but overestimating future rates of return can get people into a lot of trouble. When planning for the future, it is best to hope for the best while planning for the worst. Create a model to understand what the future will look like, making conservative assumptions such as inflation being a bit higher than historically, rates of return being lower than historically, spending being higher than estimated, and living longer than your family has. This is worst-case planning and it is what we want people to do. As mentioned before, the ultimate goal is to deliver clarity, confidence, and freedom to people when planning for retirement.
Key Tips Regarding Taxes
One of the key things is to understand the withdrawal order and how it affects how long your money will last. In the United States, for example, there are different types of accounts, such as taxable accounts, tax-deferred retirement accounts (e.g. IRAs), and tax-free accounts (e.g. Roth IRAs and Health Savings Accounts (HSAs)). Therefore, understanding the best withdrawal order can make a big difference in how long your money will last. In the Calculator such as the one James has helped build, people can model different withdrawal orders and to see how much money will last in each scenario. It also takes into account the Affordable Care Act which can affect the premiums people pay for health insurance. When people retire early, they may need to self-insure for health insurance from age 60 to 65, and by taking money out of the Roth IRA first and keeping their Modified Adjusted Gross Income low, they may be able to qualify for Affordable Care Act subsidies and keep their costs low. Moreover, people don’t always understand the taxation of Social Security, so understanding how different accounts are withdrawn can have an effect on it. Taxation is an important factor to consider when deciding how to withdraw money, and keeping expenses low is key to making sure that you keep as much money as possible afterward.
The number one tip for retirement planning would be to create a thorough grasp of your spending. This means taking the time to do the hard work of estimating how much you will be spending. Additionally, keep your fees as low as possible, and create global diversification across asset classes and sectors. When you retire, think about diversifying your money across time segments in order to help reduce the risk of the sequence of return risk. Consider using a bucket strategy to help you optimize a portfolio or withdrawal strategy.
Lastly, the most important thing here is to remember that you want clarity in your life. You want to have the confidence to understand your financial numbers and the freedom to live your best life. At the end of the day, people don’t want to spend all their time worrying about money. We want to maximize life and make sure that people are getting the most out of their time with the people they care about. Money should be a tool to help foster relationships, create a stronger, healthier community and help others. This is where all the joy of life comes from, not from having more money in the bank. In fact, sometimes the people with the most money can be the most depressed.
Having a good retirement plan that focuses on the questions of income security, health care, and lifestyle needs is an essential way to ensure a successful retirement. A well-thought-out retirement plan should include strategies for managing expenses, building savings, and investing wisely. Additionally, it is important to understand the different types of retirement savings accounts and insurance policies available. As well as considering the tax implications of these decisions. By creating a comprehensive retirement plan, individuals can ensure that their financial goals are met and their retirement years are enjoyed with peace of mind. As the Global Risk Community team, we thank Jason Parker for his expertise and insight into a sound retirement plan.
More information about this topic is available in our original interview, which is accessible here.
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