COVID-19 has changed a lot of plans

On the macro level, it has changed many federal, state, county, and city plans. On the micro level, COVID-19 has also changed many a company’s plans, as well as many an individual’s retirement plans. Companies have fought the pandemic with furloughs, work from home (WFH) and unfortunately, via outright closures. The true economic impact of COVID is yet to be determined, as many companies (and their employees) may wither on the vine as consumer spending recovers too slowly for their benefit. If the impending economic malaise is leaving you uncertain about your future employment/retirement situation, then you might want to run this quick three (3) step analysis prior to taking the retirement plunge or before embarking on your next job search.

Step 1 - Tally up your annual spending

Generally, research seems to show that one needs about 70-80% of their pre-retirement income to maintain their standard of living in retirement. Since you are no longer commuting to work five days week, no longer possibly eating out for lunch those five days, and no longer making contributions to your retirement accounts, your annual cost of living should diminish somewhat. That’s a good thing. As controlling your spending in retirement is one of the biggest levers a retiree can manipulate for improving success in their golden years. Now, of course, the more granular you are about forecasting your expenses in retirement, the better you can chart out your anticipated future cash flow needs. For example, if you know your annual household budget, estimated annual healthcare costs, and the years that you wish to make major expenditures (e.g., a new car every five years or so, travel plans, gifts to children or charities, a home remodel, etc.), you can set-up a reasonable cash flow worksheet for your anticipated future expenditures within Excel. You can refine this granular expenditure worksheet as you go through retirement.

Step 2 - Tally up your annual retirement income sources (excluding your retirement accounts)

For this step, we are looking at things like Social Security, any pensions you may have, royalty or rental income, and/or anticipated income from side-jobs or part-time work in retirement. Once you have a decent idea as to your estimated annual income (sans portfolio withdrawals), take this value in step 2 and subtract it from your value derived in step 1. By way of example, if you found that you needed about $100,000 per year to sustain your annual standard of living in step 1; then, if your step 2 annual income sources tallied to around $60,000 per year, you would then need about $40,000 per year from your investment portfolio.

Step 3 - Compare your annual portfolio withdrawal amount with your overall portfolio amount

Does your initial annual portfolio withdrawal amount exceed 4% of the value of your overall portfolio? If so, you might have to cut back on your expenses, save more, or retire later. Incidentally, with projected returns for stocks and bonds being relatively subdued over the next decade, a 3% withdrawal rate may be a little more realistic for a 60% stock/40% bond portfolio over the next 30 years. You can always spend more in later years if it is available - it’s a little tougher to add back into your retirement portfolio when you are 10 years into retirement. For more information about retirement withdrawal rates click here for an earlier blog post.

Do your end of plan portfolio projections leave a safety margin for the possibility of incurring long-term health care shocks, such as, assisted living needs? If you plan on self-insuring via your investment portfolio, you will want to make sure you have a couple hundred thousand in place to cover your end of life health care needs as your plan winds down.

Do you plan on leaving a legacy or sliding into the grave on your last penny? Again, end of plan portfolio projections become important regarding this decision.

For more information about do-it-yourself retirement planning, please click here for an earlier blog post about this topic.

There are many more factors to consider, but this will give you a pretty good start on figuring out when you can retire. If you have questions about your retirement possibilities or your investment portfolio, please feel free to contact Intelligent Investing at www.mynmfp.com/new-clients for a no-obligation consultation.