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Why One Size Doesn't Fit All in Retirement Planning

Retirement planning refers to planning for your future needs after you quit working. It can include tax planning, healthcare planning, debt management, as well as basic budgeting, among other similar financial components. While all investors, irrespective of their retirement age, income, or net worth, carry out retirement planning, it can differ for everyone based on their needs. Retirement planning can be an intricate process. You may have several goals, multiple income streams, and more than one financial dependent in retirement, and accounting for all of these concerns and others can be challenging.   

Given the fact that an average retirement can last 20 years or more, it is essential to prepare for it well. This is why it is often advised to start retirement planning as soon as you can, preferably in your 20s and 30s. However, no matter when you start, the process can be intimidating. You may follow the same path as your parents or siblings or go by the book as far as traditional saving practices are concerned. But the outcome may not always be favorable. This is primarily because there is no uniform rule or pattern in retirement planning that can guarantee 100% success. Everyone's needs are unique; therefore, only a customized plan can help you succeed. Consider consulting with a professional financial advisor who can create a customized retirement plan suited to your unique financial needs.

Find out more about how to plan for retirement for your individual goals and ensure financial security for as long as you live.

Is there a rule of thumb for saving for retirement?

There are several guides and tricks floating around that may instruct you to save a particular amount for retirement or follow a specific withdrawal percentage to ensure longevity. And while these can be used as general advice, they are not entirely accurate or guaranteed to bring you financial security. The critical thing to understand is that your financial goals will starkly differ from others. Your age, profession, lifestyle, family composition, spending habits, and relationship with money determine your future retirement needs. For instance, a family of four with two earning individuals and two healthy children planning to attend college will follow a different path and pace to retirement than a family of a single earning member with one disabled child requiring constant medical attention and one child planning to attend college.

Additionally, your income and profession dictate your retirement planning as well. A medical or tech professional may start at a higher salary and move up the income ladder faster than someone with no college degree. Business owners may find erratic financial growth more than steady income earners. All of these factors impact your ability to save and invest at a given time, ultimately affecting your retirement nest egg. The pace at which you earn and save money also determines the time of retirement. If you are able to amass a sizable amount of wealth early in life, you may like to retire early. On the other hand, if you are not able to save enough or face an unexpected loss or financial emergency, you may be forced to postpone your retirement. This will impact the length of your retired life and your withdrawal rate.

For example, the classic 4% withdrawal rule of thumb for retirement savings was invented almost 30 years ago, in 1994. According to the rule, retirees can withdraw 4% of their total retirement nest egg in the first year of retirement. After that, they can adjust the amount to inflation and add it to the 4% to determine the proper withdrawal amount for every year. While this is a general rule that a lot of people use or know of, it cannot be applied to all retirement plans. Firstly, the 4% rule only applies to a retirement portfolio comprising 50% stocks and 50% bonds. If your portfolio's allocation differs from this, the rule may not offer you the same results. 

Moreover, the rule was devised in 1994, when the lifestyle needs were very different from today. The choice was limited when it came to technology, and there were lesser health issues and lower medical expenses. Today, technology tops the list of expenditures because of which electricity consumption is higher, and so are the bills. People travel more. There are more products in the market, leading to higher expenses. Healthcare expenses are much higher as illnesses' frequency, and severity is relatively higher. 

A recently conducted study also found that 3.3% should be the new 4% rule, as the latter can be very aggressive for the present times. Again, 3.3% would also be relevant for only a section of people and for a limited amount of time before lifestyle habits and needs evolve again. 

How much to save for retirement as a rule of thumb

The median retirement income in 2022 for retirees between the ages of 60 and 64 is $66,803. For people between the ages of 45 and 49, it is $91,113, and for those over 75, this is reduced to $36,925. As you can see, these averages lower with age and are not uniform. Moreover, these averages may not apply to all states, households, and family types. Hence, there is no fixed figure that you can aim for. Factors like inflation, changing lifestyles, advancing age, and others will impact your retirement needs time and again. Therefore, you need to adopt a personalized approach to retirement planning rather than a premeditated one.

Here are some things you can follow to ensure you have adequate funds for all your requirements:

1. Take a look at your income

Your income and income sources play an integral role in retirement planning. While your salary or business income will constitute the majority of your income and savings, it will not be sufficient to counter inflation. Therefore, try to add as many diverse income sources as possible when planning your retirement. Keep a blend of assured, occasional, and high and low-risk income sources. For example, rental income can be a continued and guaranteed way to build financial security. While you may lose your job or may have to quit due to a health condition, a rental income is more or less guaranteed for life, depending on the type and location of the property. Likewise, dividends, interest, etc., can be helpful to counter inflation and also offer tax advantages (long-term capital gains tax). Hence, try to analyze all existing and probable income sources and then plan your retirement.

2. Consider the financial needs and expenses of your dependents

A customized retirement plan according to your family's unique requirements will ensure you do not run out of money at a later stage. If your spouse and children are dependent on you, you will need to save more. Your withdrawal rate may also be higher than that of other retirees, as your expenses will be higher. Therefore, the traditional 4% or 3.3% may not always suffice. However, if your spouse is also earning, you can plan your retirement together. You can also consider options like postponing Social Security benefit withdrawals to maximize the value of your check later. Since you would have more income sources jointly, both partners can delay Social Security, or one partner can delay claiming the benefit while you use the other's to cater to your needs. There are multiple permutations and combinations here that you can employ based on your requirements and your family's lifestyle habits.

3. Plan your retirement age

Some people prefer to retire early in their 40s or 50s, while others consider retiring at the full retirement age or beyond your 60s. Both groups require two very different types of retirement plansRetiring in your 40s can extend your retirement up to 40 years or more. Even if you start working in your 20s, you will have a career of a little more than 20 years to earn, save, and invest the money that should last you for 40 years. This can be made possible in two ways – the first is to earn more, and the second is to save more. If you fall in the high-income category, you may be able to amass sufficient funds to last you a lifetime in a few years. However, if you do not earn as much, you would need to adopt a much more frugal living style. This includes saving the majority of your income, curtailing your pre- and post-retirement needs and keeping a check on your retirement withdrawals, investing in instruments that can offer inflation-beating, aggressive growth, and more.

On the other hand, if you decide to retire in your 60s or later, you have enough time to gradually build your retirement nest egg. This will reduce the burden of saving and investing drastically and offer more room for trial, error, and time. This option will also reduce the length of your retirement, which will shrink your overall financial needs compared to the early retirement plan.

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4. Select the city you want to live in

A lot of people move to smaller towns in retirement to save money and live a slow-paced life. If you have been living in a big city and considering moving elsewhere, your monthly expenditure will likely drop. Likewise, a lot of people also think of moving to a bigger city to help their children out with their grandkids. In this case, your monthly expenses may increase. Make sure to plan or account for these changes in your retirement plan to ensure you are not caught off guard later. Typically, it can help to downsize in retirement. Since your children will most likely be out and settled, you can consider moving to a smaller house. Similarly, you can also eliminate other expenses by selling off additional cars or other things you do not use anymore.

No matter where you live, one of the most important things for you to check is the tax rate in that state. It can evidently help to pick a tax-friendly state. Ensure you understand tax laws surrounding income, estate, and inheritance tax, among others, as these can affect you and your immediate family.

5. Make periodic adjustments to your retirement plan

Retirement planning is a long-drawn process that will take years to finish. A lot can happen during these years. You can get married, divorced, have children, lose a loved one, change professions or cities, move to a different country or adopt a different lifestyle. All of these personal events and changes will affect your finances, too. Therefore, reviewing your retirement plan time and again is advised to ensure you are aligned with your current financial goals. It is also essential to understand that your retirement planning may not always be in line with your expectations. Market downturns like a recession, high inflationary periods, personal losses, professional upheavals, etc., can affect your financial growth. You may lose your job in a recession, and your stock values may drop. These events can also take place during retirement and impact your withdrawal rate. However, during times like these, it can help to take on professional help and take corrective action as and when needed. These events can be overwhelming, but panic usually leads to further loss. So, try to seek professional assistance instead of following any pre-established rule of thumb for retirement savings to avoid any mistakes. This is particularly critical post-retirement, as you would have very few opportunities and time to make up for any losses. 

To summarize

Knowing how to plan for retirement can seem confusing. However, the best course of action is usually to follow a personalized approach that targets your financial concerns and needs. Any rule of thumb or generalized advice can only help you up to an extent. Beyond that, you would find it hard to see any real success. Therefore, understand that no one size fits all and create a retirement plan that reflects your financial goals. If you find that confusing, consider hiring a financial advisor to get an expert's opinion on the matter.

Use the free advisor match service to connect with 1-3 financial advisors based on your financial requirements. All you need to do is answer a few simple questions about yourself and the match tool will help connect you with advisors suited to meet your financial needs and goals.

For further information on the most suitable retirement benefits for your financial requirements, visit Dash Investments or email me directly at dash@dashinvestments.com.

About Dash Investments

Dash Investments is privately owned by Jonathan Dash and is an independent investment advisory firm, managing private client accounts for individuals and families across America. As a Registered Investment Advisor (RIA) firm with the SEC, they are fiduciaries who put clients’ interests ahead of everything else.

Dash Investments offers a full range of investment advisory and financial services, which are tailored to each client’s unique needs providing institutional-caliber money management services that are based upon a solid, proven research approach. In addition, each client receives comprehensive financial planning to ensure they are moving toward their financial goals.

CEO & Chief Investment Officer Jonathan Dash has been profiled by The Wall Street Journal, Barron’s, and CNBC as a leader in the investment industry with a track record of creating value for his firm’s clients.

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The blog articles on this website are provided for general educational and informational purposes only, and no content included is intended to be used as financial or legal advice.
A professional financial advisor should be consulted prior to making any investment decisions. Each person's financial situation is unique, and your advisor would be able to provide you with the financial information and advice related to your financial situation.