As many of us rethink certain aspects of how we want to live in a post-Covid world (e.g., more time with friends), some corporate executives have increasingly been asking us at Van Leeuwen & Company about one area in particular: retirement.
This uptick in interest in retirement is not merely anecdotal. On the heels of the pandemic, many more people across the country have chosen to accelerate their retirement in the past year. According to a Pew Research Center analysis, the number of retired Baby Boomers increased by more than 3 million in the third quarter of 2020 compared to the same quarter of 2019.
For some of our successful and ambitious clients, who had planned to work for another 10-12 years but are now contemplating retiring in 3-5 years, they discuss pursuing everything from starting a new business venture to other intellectual and adventurous interests in “retirement.” They often eschew the full-time, leisure model of leaving the working world for something more varied and engaging.
If you are one of these professionals considering retirement, you likely have the same crucial question as our clients: Do I have enough money to maintain living my desired lifestyle without running out?
Do I have enough to retire?
You would think this answer would be fairly simple, and for people with fewer assets and accounts it can be. But for corporate executives like you, who often have an array of investments and income sources, as well as more complex benefit packages (e.g., equity compensation), it’s an involved process, which is outlined in the steps below.
In a nutshell, you need to clearly understand your current financial position and conduct a rigorous analysis of your retirement income sources (e.g., 401(k), Social Security) and portfolio (e.g., stocks) in different scenarios to create the most effective strategies that will enable you to live out your unique vision of retirement.
Step #1. Determine what you want to do in retirement
You can’t know how much money you’ll need in retirement if you don’t know what your goals are for this next phase of life. It all starts with what’s important to you and what you want to make happen.
For example, maybe you want to embark on some immersive travel experiences, help an adult child buy a first home or cover the price of long-term care for a loved one. Perhaps you would like to spend most of your money in these areas during your retirement years and leave a limited number of financial gifts to family and charitable causes.
Or maybe you want to focus on writing a book and mentoring young professionals, potentially lower-cost pursuits, while spending time with family and friends in your vacation home. And perhaps you’re excited to leave a generous financial legacy to your children and grandchildren, as well as the nonprofit organization that you’ve
supported for years.
Each of these goals and preferences drives your financial retirement plan.
Step #2: Detail your current expenses and the expected costs of pursuing your retirement goals
To answer the “do I have enough money to retire?” question requires completing the financial planning process, which starts with your current expenses.
If you are in your 50s or older, you may have a handle on how much you’re currently spending on items such as mortgage(s), tuition(s), health care, travel, shopping and more. If you expect any of these costs to be lower in retirement, then make note of this difference.
Once you’ve written down these expenses, the next step is to estimate what it might cost to pursue the retirement goals that you outlined in step #1. Then take this number and add it to your current expenses to come up with an estimate of how much you will spend per month in retirement.
You may find, like some of our clients, that you might actually spend more - not less - in retirement depending on your plans to travel, upgrade health care and long term care insurance and/or financially help out loved ones. However, with the right financial strategies, you might not have to sacrifice.
Step #3: Outline your income sources
After completing step #2, you should have a reasonable idea of how much you need each month to cover your costs in retirement. The next step is to take stock of the various income sources you will be relying on to pay these expenses as you will no longer have a traditional work salary coming in. These sources may include:
- Bank savings and checking accounts
- Investment portfolio (stocks, bonds)
- 401(k)’s, IRAs, Roth IRAs and Roth 401(k)
- Equity compensation/employee stock
- Deferred compensation
- Golden parachute payments
- Social Security
- Any rental income
- Any consulting income
As you can see from the above list, determining the value of some of these income sources, particularly those that comprise your executive benefit package, isn’t always simple and straightforward.
Considering only 50 percent of employees can interpret their basic benefits, such as their health insurance and 401(k), according to a survey from the Employee Benefit Research Institute, it’s not surprising that far fewer understand the complexities around the employee stock, deferred compensation and golden parachute packages that many corporate executives receive.
This lack of knowledge around how much these benefits might be worth in different scenarios can make accurate planning tough and hamper your ability to maximize these enhanced benefits. This is why a planning professional who specializes in working with executives who have such packages can be helpful in translating how these benefits can be best leveraged as key parts of your financial retirement plan.
Step #4: Analyze your assets and accounts
Although you hopefully now have an increased understanding of your various sources of funds to pay for your lifestyle and goal-driven pursuits in retirement, the question circles back to “do you have enough to cover your lifespan?” And if so, “what’s the most effective way to maximize what you’ve financially accumulated and grow your investments?”
To answer these questions, you need to create a data-driven analysis of your assets and accounts and stress test them through simulating different scenarios, such as tax changes or a depression, to show how you might most effectively achieve your retirement goals while remaining well-funded throughout your life.
Most importantly, you need to ensure that the assumptions you use in your analysis are reasonable and accurate. If not, the projections about how long your money will last might be misleading.
When we conduct this sophisticated pre-retirement analysis for our clients at Van Leeuwen & Company, we use some of the following assumptions:
- You will live to 100. More and more people are doing so. Although a common rule of thumb maintains that you need 25x to 30x of your annual salary to retire, this cookie-cutter approach is not a safe assumption, especially if you retire at 55.
- A conservative rate of return. Although many investors may have had an impressive decade of high returns, it is too risky to assume such positive portfolio results will continue unabated year-after-year.
- A conservative long-term inflation rate. The U.S. rate of inflation usuallyfluctuates between 1.5% - 4% per year. But in our experience, people don’t account for, or underestimate, the long-term impact of inflation. The pitfalls of not accurately factoring in inflation can result in a retirement plan that paints a rosier picture than the reality and leaves an unexpected cash shortfall. To prevent such a situation, we always assume a conservative long-term inflation rate.
At the end of this analysis, you will clearly see the pros and cons of the options before you to create a robust retirement plan.
Step #5: Make data-driven decisions so you can financially relax
With analysis in hand, you have the hard data to make the type of key decisions, such as when to exercise stock options, and create new strategies that minimize your tax burden and maximize the value of your holdings.
An planning professional who specializes in serving corporate executives can help navigate you through this complex process and provide the clarity you need to make smart decisions for your financial future. And because retirement planning is a dynamic process, a professional can ensure you make adjustments to your plan as circumstances change. This way you’re always on track to live the retirement you deserve and envision!
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. Thank you.