Estimate your retirement expenses “Depending on personal circumstances, individuals need 60% to 90% of preretirement income to maintain their current living standards in retirement,” says Christine Fahlund, CFP, a senior financial planner at T. Rowe Price. So whether you plan to travel, take classes, learn to paint, or just relax, you should begin by estimating your annual expenses when you’re retired. Remember to include everyday costs such as housing, food, clothing, health care, real estate and income taxes, insurance, and transportation. When calculating your budget, keep in mind that your activity level and expenses will evolve throughout your retirement just as they did during your working years. Know your retirement income sources Once you’ve estimated your future expenses, you’ll be better prepared to evaluate whether your investment strategy is on target to meet your future needs. Note that your retirement income may be generated from a number of sources, including Social Security and pensions as well as tax-advantaged and taxable investment accounts. The amount you will receive in Social Security benefits depends on the number of years you and/or your spouse worked, how much you earned, and the ages at which you would like to retire. To calculate the amount you can expect to receive, visit www.ssa.gov or review the estimate of future benefits you receive in the mail each year from the Social Security Administration. Plan a draw down and investment strategy If you have many types of accounts from which to draw income, your initial withdrawals should come from your taxable accounts, followed by your tax-advantaged accounts. This will allow your tax-advantaged assets to continue to compound for a longer period of time without the impact of taxes. While it may be necessary to occasionally adjust your withdrawals to meet immediate needs, you should withdraw no more than 4% of your retirement assets in the first year—considering your retirement may last for 30 years. To maintain the same purchasing power, you’ll need to increase your initial withdrawal amount by 3% each year to account for inflation. In other words, if you withdrew $40,000 your first year in retirement, you would need to withdraw $41,200 (1.03 x $40,000) your second year, $42,436 (1.03 x $41,200) your third year, and so on. Reviewing your progress annually can help ensure that your investment strategy remains on track. Knowledgeable investment choices can also enhance the potential of your long-term retirement assets. “Even if you’re already retired, you should continue to invest for growth by maintaining some equity exposure in your retirement plans, IRAs, and taxable accounts,” says Fahlund. “The growth potential of stock exposure may reduce the risk that inflation will significantly decrease the purchasing power of your portfolio during retirement.” Manage the gap If you’ve determined that the total of all your income sources still won’t cover your projected expenses, you’ll want to consider alternatives to correct the imbalance without increasing your withdrawal rate. While it may be tempting to initially draw down more than 4% of your savings, it can be very risky if you are counting on your assets to support you for another 30 years. One alternative is to find ways to trim your anticipated expenses in retirement to better match your expected income level. If this proves difficult, you may want to delay retirement or consider working part time during the early stages of retirement to supplement your income. Working an additional year or two before you retire gives you more time to accumulate retirement assets while theoretically reducing the number of years that your income must last. By thoroughly assessing your post-employment plans and regularly monitoring your financial situation, you can be in a better financial position to maintain your lifestyle when you are ready to retire.

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