Of all the rules of thumb for living, none are more misunderstood, or more dangerous, than those aimed at retirement financing. Take, for example, the widely quoted — and too often used — rule that you will be comfortable with, and should plan to live on, about 70 percent of your preretirement income in retirement.
For some of us, that will be plenty; for others, not nearly enough. Using advice tailored to an “average” employee is risky. In my professional experience, I’ve seen a bias in favor of maintaining, or even increasing, standards of living in retirement.
Chances are that you’re not the average person, so why condemn yourself to live like one? If you’re many years from retirement, the following tactics will help you to do what few have done — retire on 100 percent of your pre-retirement income. If you’re close to, or in, retirement, your options to increase your standard of living are limited, but some of these ideas may still work for you:
Apply discipline. Maintain the discipline to “work the plan.” I can’t tell you how many times I’ve seen headlines, or even water-cooler chats, adversely affect an investor’s decision making. If the plan was built on the assumption that you will maintain a certain asset allocation in your Thrift Savings Plan over a specified time by rebalancing it to that allocation once per year, then doing exactly that is the prudent, disciplined thing to do.
Estimate your pension income. Knowing how much you, and your spouse or partner, can expect from Social Security and pension income in each year of retirement is critical to knowing how much you’ll need from savings and investments to replace all of your pre-retirement income.
Develop a savings target. Working backwards from your withdrawal needs in retirement will enable you to determine how much money you’ll need to have accumulated when you begin retirement. The answer will depend upon a number of factors, including how the money will be managed in retirement, the duration of your retirement, tax and inflation rates, and the pattern of withdrawals you’ll need from year to year. Depending on your unique factors, the amount you’ll need to save will probably fall between 15 and 100 times the average annual amount you expect to withdraw. This huge range is a reason why rules of thumb won’t work.
Save enough. Once you have determined your savings target, you can figure out how much you’ll need to save each year to meet your needs. Again, the answer will depend on your circumstances and how you manage your investment decisions. Want to save less? You can plan to work longer, or invest more aggressively, or leave less behind, for example. If you’re not sure how much you need to save, making the maximum contribution to your TSP account each year is a good idea.
Manage your investments prudently. In most cases, your ability to retire on 100 percent of your preretirement income will depend on how your savings and investments are managed along the way. Proper asset allocation, diversification, rebalancing discipline, cost control and risk reduction are essential to maximizing the probabilities of achieving your retirement goals. The TSP allows, even promotes, these objectives. Follow these objectives in any other accounts that will be instrumental in funding your retirement.
Insure. Savings and management discipline can be rendered useless if you face a large unexpected expense. Have appropriate health, disability, liability, property, life and long-term care insurance at all times.
Adjust your retirement point. It may be necessary to plan to continue to generate some income after you have officially retired, to make sure that you can enjoy the retirement standard of living you want. Increasing your pension by working even one or two more years can make a big difference. If you have accumulated savings and investments that are at least five times your desired retirement income stream, you can probably retire on 100 percent of your pre-retirement income if you delay your retirement past age 65. And, no, that’s not a rule of thumb — just an educated guess.