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Majority Of Workers Have Not Taken Basic Retirement Planning Steps

The retirement crisis is getting worse for the average American as the majority of workers have not taken basic retirement planning steps according to an article from Time. The most recent annual survey data collected from the Employee Benefit Research Institute have noted that many workers have shaky faith in their financial futures and their actual retirement planning is even worse. Only 48% of workers have tried to figure out how much they will need saved for retirement and even less have calculated how much they will receive in Social Security benefits.

This begs the question: are you financially ready for retirement? Many Americans don't know the answer to that and in the US, 10,000 people turn 65 years old every day and the majority are retired or thinking about retirement. Numerous studies show that their biggest worry is running out of money but many of them don't have plans for their retirement. However, Peter Culver, a Senior Wealth Director from BNY Mellon, an American worldwide banking and financial services corporation based in New York City, says there's hope - it just requires building a financial roadmap for retirement.

Culver says, "Trying to reach your financial goals without a plan is like driving without a GPS. You need a map to guide you on your way." He offers up these four steps:

1. Get a handle on your expenses - This single, biggest risk in retirement is spending too much money. If your expenses exceed your income, you will be forced to invade your savings. If you do that too aggressively, you could run out of money. Using your checkbook or online banking records, calculate your expenses for the last year. As you do that, divide them into two categories: Basic living expenses (“needs”) and discretionary expenses (“wants”)

2. Calculate your retirement income - Once you retire, your paycheck will go away. So, you need to calculate how to replace your paycheck. The first step is determining all your other sources of income.  Consider all the following, and get detailed information from the providers about the amounts of income you can receive:

  • Pension Plan
  • Social Security
  • Other Outside Income
  • Deferred Compensation

Once you have the gross amounts, be sure to calculate the income taxes on those amounts. You can only spend after-tax dollars, so you need to know what your net after-tax income will be (your CPA or Financial Planner can help you make this calculation)

3. Calculate your investment income - If you have a “gap” between income and expenses, then you will need to make up the difference from your assets.  The first place to turn is your investments. Assemble all the records for the following, and calculate the amount of income they generate:

  • 401k Plan
  • IRAs
  • Personal Investments

In the case of your personal investments, your statements should show the annual income from stock dividends and bond interest. In the case of 401k Plans and IRAs, you may withdraw money as soon as you turn 59 ½; once you turn 70 ½, you must take out the “required minimum distribution” (approximately 5% per year). Again, be sure to calculate the after-tax income from these sources.

By completing Steps 1-3, you will know how much income you need in retirement, and how much of that income is already provided for. If you have the income you need, congratulations! If not, and there is “gap” between your income and your expenses, then you need to complete Step 4.

4. Analyze your assets - If you have a gap between your income and expenses, you will need to make up the difference from your principal. Although this calculation can be complicated, there is a rough rule of thumb that you can follow. If you have a “balanced” portfolio – 50%-60% Stocks and 40%-50% Bonds – you can withdraw 3%-4% of the principal per year and the principal should maintain its value.  For example, if you have $2 Million in total investments, and you allocate your investments 60% Stocks and 40% Bonds, you should be able to withdraw up to $80,000 ($2,000,000 x 4%) each year to help close the “gap” between income and expenses.

By following these four steps, you should have a good handle on how your personal income/expense ratio will look in retirement. If there is no “gap”, then this may be all you need to do. However, in most cases, you will greatly benefit from the help of a Financial Advisor. A Financial Advisor can help you assemble the “base line data”, calculate your after-tax income, help you determine any withdrawal you may need to make from your investments, and prepare detailed projections of your income and expenses throughout your retirement.

About Peter Culver:

  • Culver is a seasoned financial wealth advisor and has earned numerous recognitions for his work at BNY Mellon.
  • He has helped his clients develop personal financial strategies while practicing the best methods to minimize risk.

If you are interested in learning more about retirement planning, Peter Culver is available to provide additional information.

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