You Actually Don’t Need a Miracle to Retire Comfortably

Investors often worry about their retirements, especially during market corrections. Around half of Americans surveyed by benefitspro.com think they’ll need a “miracle” to meet their basic retirement goals.

Fortunately, miracles aren’t required if you do some planning. If you understand the key risks and are smart about cash flow, you can have a stress-free retirement.

Identifying key risks

It’s important to understand the potential financial risks if you want to retire in a comfortable position. Fear causes discomfort, and it’s hard to overcome if there are too many unknowns. Education and careful planning are great tools to put those concerns to rest.

The most prominent financial risks in retirement are:

Longevity: You may outlive your money.
Inflation: Rising prices reduce the buying power of your assets and cash flows.
Interest rate: Low yields reduce the investment income available for retirement portfolios.
Stock market: Your savings lose value when asset prices fall.
Expenses: Higher-than-anticipated cash needs may be due to healthcare, housing, or higher living standards (such cellphone bills that weren’t relevant 20 years ago).

There’s a common theme running through the above risks — they’re all related to liquidity and cash flow. Retirement planning is all about ensuring that you have enough cash to cover your financial needs.

Sources of cash flow

Everyone has different sources of retirement income, but there are a few different categories that produce the vast majority of cash flow. First, most retirees receive Social Security benefits. The amount of benefits received depends on the amount of income earned throughout your working life and the age at which you elect to start receiving benefits.

In general, the more you earn, the larger your Social Security checks will be. You can also increase your benefits by delaying the start of payments. Right now, the maximum monthly benefit is just under $4,200, while the average benefit is around $1,660.

Some retirees have pensions, though this has rapidly become less common in recent decades. Pensions provide guaranteed payments to retirees, usually on a monthly basis.

Most people don’t have pensions to supplement Social Security income, but it’s still an important piece of the puzzle for millions of households. The typical pension benefit is between $1,000 to $2,000 per month.

Many households rely on accumulated assets to meet retirement-lifestyle goals. Retirees hold liquid assets in 401(k) accounts, traditional and Roth IRAs, brokerage investment accounts, and cash. When people need cash, they can withdraw funds from their various accounts.

Investments also produce income and growth that can be used to pay for living expenses in retirement. Many retirees are able to meet their needs through dividends and interest that are produced regularly in their investment accounts.

Building and managing retirement investments

Once you know how much guaranteed income you’ll receive from Social Security and pensions, you can calculate the cash flow required from accumulated savings and investments. In my view, it’s impossible to come up with a magic number that you’ll need to retire comfortably — there are too many variables that can impact that number over the span of a few decades. Still, there are some important rules that you can use as reliable guidelines.

The 4% Rule suggests that you can safely distribute 4% of your retirement account each year without running out of money. That’s been revised downward in recent years due to low interest rates, rising healthcare costs, and longer life expectancies. At a minimum, you should plan to have $250,000 in an investment account for every $10,000 of annual after-tax cash flow required in retirement.

Embedded tax liabilities are important to consider. Withdrawals from your 401(k) and traditional IRA assets will be treated as ordinary income, whereas Roth IRAs and qualified dividends in a brokerage account could avoid taxation.

It’s likely that most households will require more than $1 million in savings to meet their retirement lifestyle goals. That number might seem daunting, but it can be accomplished with systematic saving and a long-term investing strategy that balances volatility and growth.

Households should strive to save 20% of their annual earnings. Common strategies to improve savings rates include taking full advantage of employer 401(k) matches and sticking to an expense budget.

When you’re relatively young, you should prioritize growth with your retirement funds. Short-term volatility isn’t relevant for people who aren’t selling for multiple decades and have time to ride out multiple market cycles. A focus on long-term growth should help you outpace the market.

As you get closer to retirement, you’ll have to sacrifice some growth in order to reduce volatility. Owning value stocks and bonds will keep you from suffering catastrophic losses in a potential bear market prior to retirement.

If you can save $1,000 per month and invest that for a 6% average return, it will take just under 30 years to reach $1 million. That’s easier said than done, but there’s a blueprint to get there, and that should really help address the key risks in retirement.

Understanding your sources of retirement income is the best way to build a successful financial plan for your senior years. A lot of things will change along the way, but staying focused on cash flow is the key.

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