Offered by: Brian Engle – Prudential Advisors
Today’s challenging economic environment has forced many Americans to review their retirement planning goals with a more critical eye. While most core principles about retirement planning still hold true no matter the environment, a few may require some slight modifications. Who couldn’t use a roadmap to help prepare and execute a successful retirement strategy?
When it comes to retirement planning, we all want to know what “the number” is: That magic dollar figures that, when reached, means you’re set in retirement. Sure, knowing your number—and reaching it—is good, but it’s only part of the equation. Mastering the accumulation phase without factoring in the distribution phase could render all your hard work saving toward your number moot.
Instead, you should think about retirement in terms of income needs. The accumulation of, say, $300,000 is not meaningful for living in retirement unless you can translate that figure into a yearly or monthly income stream. You need to be able to pay your monthly food, rent and utility bills, as well as health-care expenses—and have enough left over to live the way you want to live in retirement.
When you consider your retirement income needs, make sure you also factor in that some of your assets have a built-in tax liability. In other words, view your retirement assets with a “tax lens” on so you can see their true economic value. You can’t pay your rent or utility bills with before-tax dollars, so it’s important to understand what you’ll be left with after taxes before concluding you’re saving enough.
Longevity risk and investment risk are other items the number approach does not consider. So to use the same example, you’ve reached your $300,000 number, but how do you know that a sufficient amount will be there 20 years later? If the assets decline to $200,000 in the next year, what does that mean for your future? Are there ways to manage these longevity and investment risks? By translating the number into an income stream, you can better see what a decline in asset value will mean to the longevity of your assets.
The message here is that retirement planning should be done considering income needs. If you base it purely on accumulation, or reaching “your number,” you won’t adequately define your retirement planning goals or manage retirement planning risks. By choosing strategies that mitigate the risks of poor investment return or of outliving your assets, you will substantially reduce your plan’s risk of failure.