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Get a Handle on your Retirement

Every day, roughly 10,000 Americans must decide whether they have achieved sufficient financial independence, enough to be able to leave the paid workforce. The questions of retirement preparation are easier to ask than to answer. They should not be taken for granted.

The website in October published “The Five Most Important Retirement Decisions,” based upon a study done by the Stanford Center on Longevity. Here are their questions, and our thoughts on the answers.

When and how to retire?

It is a truism that the longer one works, the larger one’s capital will be. The more one delays drawing upon retirement capital, the longer it will last.

Some hard numbers will put some perspective on that truism.

In the study, a hypothetical 62-year-old couple was assumed to have combined income of $100,000 and retirement savings of $350,000. A variety of retirement scenarios were considered. At the extremes, if both of them retired at age 62, they could expect an annual retirement income of $37,585. If they both worked full time until age 70, their annual income would then be $70,755. Options for retiring at age 66 or continuing part-time work instead of full time gave intermediate results.

In this example, the couple was assumed to consume their retirement capital very slowly, at the rates provided by the IRS for required minimum distributions from qualified retirement plans, using conservative investment assumptions. This approach makes it more likely that the couple will not outlive their resources.

When to start Social Security benefits?

To a substantial extent, the higher income achieved by the couple in this example came from their delay in starting their Social Security benefits. Early reduced benefits may begin at age 62, and an 8% benefit bonus is added for each year of delay beyond normal retirement age. For this couple, the normal retirement age was 66. No bonus accrues after age 70.

Social Security benefits are immune from market fluctuation, and they are automatically inflation-adjusted in future years. In fact, because the benefits are so valuable, some retirees build a savings bridge to temporarily cover living expenses in early retirement so as to maximize their Social Security benefits later.

How to deploy retirement savings to generate income?

In general, investing in equities during retirement provides more retirement income, but not without accompanying market risk. Investing only in equities at the start of a bear market, for example, runs the risk of exhausting the retirement capital. 

The study included an example from the problematic period of 2000-2002 following the bursting of the Internet bubble, using the IRS table for required minimum distributions. In the first year, a 100% equity investment strategy provided $97,418 of retirement income, but that fell to $59,221 after just four years as the stock market contracted. A 100% bond investment offered growing retirement income, but starting from a much lower base—$28,712 in year one and $38,280 in year four.

The middle ground of 50% stocks and 50% bonds provided the steadiest income, going from $54,599 in year one to $50,446 in year four.

However, it should be noted that, during the time frame for this example, interest rates were not at the rock-bottom levels that we see today. Also, the economic uncertainty of the early 2000s, made severe by the 9/11 attack on the World Trade Center, was still perhaps not as imponderable as the unknowns associated with the COVID-19 pandemic.

We have just been through the shortest bear market in history, and 2020 may yet prove to be an up market for many stocks. But this much market volatility can disrupt a retiree’s peace of mind.

How to adjust the retirement budget to fit within one’s resources?

On the one hand, it is generally thought that as the costs of commuting and clothing are decreased during retirement, less income is needed to sustain the same standard of living as during the work years. Accordingly, some suggest that a 70% replacement ratio is a reasonable target for retirement income.

On the other hand, retirement may be a time for more travel, for expensive interests long deferred. Medical costs typically go up during retirement, though Medicare helps to ease that somewhat. Living costs may not go down so much after all.

That’s why a comprehensive budget for retirement expenses can be a vital first step to matching income with outgo.

Whether to invade home equity?

Some of those who are about to retire have their home equity as their largest capital asset apart from employer retirement plans. That equity may be tapped by selling the home and moving to smaller quarters in a less-expensive environment. 

Example. A married couple purchased a home years ago for $300,000, and it is now worth $800,000. If they sell it for that price, realizing a $500,000 long-term capital gain, they will owe no capital gain tax on the transaction. They can move to a retirement community or condo with a portion of the proceeds, and the balance may be added to their retirement capital.

The limits on tax freedom for home sales are $250,000 for singles, $500,000 for married couples. Some restrictions apply, so sellers should consult with tax professionals before making any final decisions.

Can we be of assistance in your retirement planning?

The moment chosen for retirement is an intensely personal decision, and there is no right or wrong answer. Even common-sense rules of thumb have so many exceptions that they serve as not much more than the beginning of a conversation.

If you would appreciate an independent point of view about your retirement readiness or how best to deploy your retirement capital, please give us a call. We will be pleased to put our experience at your service. 


© 2020 M.A. Co. All rights reserved.

The information contained herein does not constitute legal, tax or investment advice by Country Club Trust Company. For legal, tax or investment advice, the services of a competent professional person or professional organization should be sought. Trust services and investments are not FDIC insured, are not guaranteed by the Trust Company or any Trust Company affiliate, and may lose value. Past performance is no guarantee of future results.