A television commercial on the air these days asks people on the street (played by actors) a fairly direct retirement question: Will you outlive your money?
It might seem impossible to answer. Who really knows how long they will live, never mind the ups and downs of the investing world?
Yet you can know some things, such as how much income you are likely to have in retirement. Once you calculate that, it’s not that hard to derive the rest from longevity tables, along with historic inflation and market returns.
But income is the first step. After you stop working, how much money you have coming in each month will determine not only your lifestyle but the likelihood of that money lasting as long as you need it to last.
So, first things first. Let’s estimate your retirement income. There are four pillars here, not all of which might apply to your situation:
1. Social Security
It’s getting a lot easier to figure out your income from Social Security contributions over the years. The government has long mailed out annual estimates, but now you can go online and look up your current retirement income analysis any time you like.
Go to My Social Security and create an account. It will take a few steps to identify you at first, but it’s worthwhile. From there, you can easily see what the Social Security Administration currently believes you will receive at early retirement (age 62), full retirement (67) and at age 70, the latest age at which you can file for income benefits.
2. Pensions and annuities
This is increasingly unusual for American retirees, but if you work or worked in the past for a government agency or a large corporation, you might have a pension plan waiting for you. Likewise, you may have purchased an annuity product as part of a life insurance package.
You can learn the ultimate monthly and annual income values of such plans by directly contacting the plan administrators. You should be getting an annual or quarterly update on them as well. If not, make sure they know where you live and how to contact you.
3. Portfolio holdings
Income from investments can be tricky. A lot of financial advisers like to suggest that 4% is a “safe” amount of money to withdraw from a conservatively invested portfolio. However, like investing itself, income from investments is a moving target.
We’ve written in the past about powerful online retirement income calculators. The important point is to make sure that your calculations include income from the other three pillars here, and that you stay smart about income taxes in retirement as well.
It’s easy to give up and say, “I’ll just work forever!” But if you know what to expect from the previous three income sources, it might change your attitude toward what work you choose to continue doing and for how long.
For instance, rather than seeking part-time work year-round, your income from Social Security, a pension and investments might create an opportunity to work seasonally and perhaps travel off-season. Balancing work and play is no less important in retirement as it was during your full-time working life.
In the end, a good retirement must be managed, much like a good career and a good long-term savings and investment plan. Once you add up all of the potential income sources, things often start to look better.