Retirement Income Planning

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Retirement Income Planning

July 28, 2020 Uncategorized 0

When Should I Begin Taking Social Security?

At 62, over half of the Americans have retired, so it is natural to start claiming at that age, when you start your retirement.  The average Social Security payout in 2019 is $1,470 or $17,640 annual.

However, if you claim early, at age 62, your benefits can be substantially lower.  It might be worth your while to wait a few more years at least till your full retirement age.

For example, for someone born on or after 1/1/1960, your full retirement age is 67.  If you can delay claiming of benefits till age 67, the total increase of benefits is another 30%.  If you can further delay it till 70, there is another increase of 24%.  The total is well over 50%.

Given longevity, it is totally worth considering delaying the claiming of benefits, at least for a few years, particularly if you have additional savings that you can live off from.

How do I plan my retirement budget?

Most people spend about 60% to 85% of their pre-retirement income on expenses after retirement.  This has a lot to do with your stage of retirement (most people spend more money on leisure early in their retirement years) and your pre-retirement income level. (If you make more, dollar-wise, it might be the similar, but percentage-wise, it is lower.)

A good way to start is to segregate your expenses into discretionary and non-discretionary expenses.  Take a look at your Social Security benefit payouts and try to use that to pay off all your non-discretionary expenses such as rent, grocery, medical expenses and transportation.

Be more flexible with your non-discretionary expenses.  Try not to spend more than 4% (also called safe withdrawal rate) of your retirement savings on discretionary expenses.  Assuming you have a 40% equity and 60% bond investment allocation, you should be able to make your money last 25 to 30 years.

How much money should I have saved before I retire?

At retirement, you should have at least 8 to 10 times your pre-retirement income.

  1. What are some key risks in Retirement Income Planning?

There are many risks to retirement income planning.

Here are a few:

  1. Market risk
  2. Sequence of returns risk
    hitting a bad market just when you start retiring
  3. Inflation risk
  4. Healthcare expense risk
  5. Longevity Risk
  6. Withdrawal rate risk
  7. Taxes

Since 50% of retirement income shortfall is due to Healthcare costs and Long Term Care expenses, so planning for medical expenses is very important.

How much is Medical Expenses in Retirement?

Total medical expense estimated for a couple at 65 is $285,000. Medicare health care coverage begins at age 65, but, on average, this only covers about 50 percent of your healthcare bills.

Medicare expense includes Part B premium, Part D (optional) and premiums for other supplemental insurance policies such as Medigap and Long-Term Care Insurance.  Medical expenses can vary widely by geographic location.  On average, one is expected to spend about $5,000 to $10,000 per year on medical expenses, not including long term care.

Should I buy long term care insurance (LTC)?

The national long-term care expense is approximately $51,000 per year.   Average number of years for men on long-term care is 2.2 and 3.7 for women.  You can either buy long term care insurance, insurance with long term care rider or self-finance.  In general, the rule of thumb of self-financing is to have at least $250,000 in liquid assets (outside real estate),

If you are interested in buying LTC insurance, you need to buy it early.  After 70, there is a 44% rate of being rejected.  Most people start claiming their LTC benefits in their eighties.  To encourage people to adequately plan for their LTC expenses wisely, the government gives out tax rebates on LTC insurance premium.

If I run into a retirement income shortfall, what are some suggested course of action?

  • Cut expenses
  • Pick up a part-time income or delay retirement
  • Take a slightly more aggressive investment approach with your investment. When market is down, instead of spending, reign in your expenses.

What is the average male and female life expectancy?

In 2020, the average American Life Expectancy is 76.1 for male and 81.1 for female.  However, the longer you live, the longer you can expect to life.

At 65, the average life expectancy for male is 82.9 and for female is 85.5.

How do you avoid taxes in retirement income planning?

There are three different types of tax advantage accounts:  Taxable, Tax deferred (like 401(k) accounts) and Tax-free accounts (like Roth).  The winning method is tax arbitrage.  Convert your tax deferred account and pay the tax when your tax rate is low.

Example:

  • You have low earnings

You will take distribution from your Traditional 401(k) or IRA account.  (You need to pay ordinary income on those accounts.)   If you don’t need the money, you can also convert those accounts to Roth 401(k) or Roth IRA and pay the lower taxes today.

  • If you have high earnings

You will take distributions from your taxable account first, then your Roth account, and then finally, your traditional 401(k) account and IRA account.  You want to minimize your tax bite by taking distributions from accounts that are tax free or low tax first.

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