Let’s face it – when it comes to retirement income, the way we watched our parents and grandparents retire is a long way from the world we live in today.
Low interest rates, longer lifespans, and taxes all contribute to a very different environment than has ever existed in the modern world.
No matter what your retirement plan is (or isn’t), there is still some planning you can do. Even if you’re just beginning to save or are forced to start over.
Let’s talk about the real “nuts and bolts” of understanding what retirement in today’s world means.
Retirement Income And …
Low Interest Rates
In years past, retirees could depend on solid returns from far higher interest rates to pay them in retirement. Today’s low interest rates mean that if you are going to depend on interest to provide your retirement income, you’ll have to start at 3, 4, or even 5 times more principal to pay those kinds of returns.
Is it fair? That’s got nothing to do with it. It’s simply the world we live in.
At the same time, this is a critical part to remember, because interest rates impact nearly every potential investment strategy. You need to be aware of the impact lower interest rates will have, because they’ll affect your savings AND your overall strategies. They’ll also affect how you might distribute your assets for growth.
Taxes
No matter what anyone tells you, taxes in the United States are still incredibly low versus historic rates.
Nonetheless, your retirement planning has to take into account whether you want to pay taxes now or later. In general, this is going to come down to some relatively simple determinations. Will your retirement accounts be based on Roth standards or on traditional standards?
Your employer-funded 401(k) is going to be taxable when you retire. While a Roth account (IRA, 401(k), or others) contains funds that have already been taxed. Each has benefits, but the reality is, you’re going to pay sooner or later.
Lifespan
Americans are living far longer than ever before. Thus, while our parents and grandparents had lifespans closer to 70 years, the average lifespan today is 80+. This means we need to accumulate more capital to overcome lower interest rates and to ensure that our money outlives us, instead of the other way around.
The good news in all this is each of these considerations is, in reality, a mathematical problem.
By looking at realistic budgets and expenses, likely lifespans, and potential (or planned) tax brackets, you can determine how much money you’ll need annually in retirement. And then, reverse engineer how you’ll need to earn (well, create) that money to meet your retirement income needs.
Yes, it’s a challenge. But far more challenging is the idea of not having any (or enough) retirement income to live the life you want and expect.
Of course, my team and I are more than happy to answer your questions about that and even make some recommendations.
The truth is, though, that you can’t afford to not begin working on this now rather than later. Give us a call and let’s get you on the right track!
