What will be covered

Life Expectancy How long will your money need to last
Inflation How will inflation impact your retirement
Investment objective What objective is appropriate for you
Income Where will your money come from
Social Security When is it best to begin claiming benefits
Expenses How much money will you need

Life expectancy

How long will your money need to last?

If you shake your head and laugh at the thought of living to 90 or longer, it is time to reconsider how long you will live in retirement. According to the Social Security Administration, almost a quarter of all 65-year old Americans will go on to live beyond 90.

People are living longer and that comes with a cost. If married, it is beneficial to plan for the longer of the two life expectancies with your spouse. No one wants to be in their late 80s looking for work or worse potentially needing to move to a more affordable area because they did not think they would still be alive. Your time horizon may be longer than you expect.

If you are 65 today, the probability of living to a specific age:


How will inflation impact your retirement?

Few things can cause as many problems for your retirement as inflation. When the average inflation rate increases, things get more expensive. It can decrease your purchasing power and should be factored into your retirement. Inflation has averaged about 3% a year since 1925. This means someone needing $60,000 for living expenses now may need about $108,000 in 20 years.

The chart below shows the price changes of goods and services from 1997 to 2017. It is a great way to show that inflation is not a uniform increase in prices, and that it varies greatly from sector to sector. During this period, the overall inflation was +55.6%.

Many investors fail to realize how much of an impact inflation can have. Inflation will reduce your purchasing power and decrease your savings faster. The Federal Reserve is targeting two percent level of inflation. To combat this, retirees need to plan to take action to mitigate against the detrimental purchasing power effects of inflation.

With recent Covid-19 government spending, we anticipate inflation can be higher than the current Federal Reserve target of two percent.

Investment Objective

What objective is appropriate for you?

Cash flow needs, time horizon, and risk tolerance are key factors when building your portfolio. Everyone has unique circumstances and goals with their portfolio. A way to determine your investment objective is to define your “growth objective”. Possible growth objectives include:

Capital appreciation
You plan to grow your assets as much as possible during your investment time horizon. This would be appropriate for someone with a long-term investment time horizon and low focus on current income.

Growth with Income
You aim to maintain your purchasing power by the end of your time horizon. Emphasis is placed moderate capital growth with some focus on generation of current income.

Capital Preservation
This is considered the most conservative investment objective. Lowering risk generally means lower the potential income and overall return.

Some people have multiple accounts with different objectives. An account that you may need cash from short term would fall in the capital preservation category where an account with no cash flow needs for 10+ years would be focus on capital appreciation.

The main goal is to have an investment objective that fits your risk tolerance and is appropriate for your situation. If you create a plan but cannot follow it during volatile periods it will not work as well as expected. Your investment objective helps create your roadmap for retirement.


Where will you money come from during retirement?

If you are currently employed, you are used to receiving a regular paycheck. In retirement your income will most likely not be as consistent. To see what your current retirement paycheck may look like consider your potential income sources:

Add your expected monthly income. If this falls short of your retirement expense need, we then have an idea of how much you will be pulling from your investment accounts (401k, 403b, IRA, Brokerage ect) every year. The amount you pull each month from these accounts is key. This is where your asset longevity projections are important to track each year.

Social Security

When is it best to begin claiming benefits?

One of the most common questions people ask about Social Security is when they should start taking benefits. Social Security can be an important source of cash flow during retirement and how much you receive can change depending on when you decide to begin claiming benefits.

Your Social Security payments are calculated based on your lifetime earnings, birth year, and when you decide to start claiming your benefits. The more you have paid into the system the higher your benefits will be. To view your benefits, log in at www.ssa.gov.

If you were born in 1960 or later your full retirement age is 67. If you claim before age 67 your payments will be reduced for life. If your full retirement age is 67, these are the reductions you can expect.

  • 62 is about 30 percent
  • 63 is about 25 percent
  • 64 is about 20 percent
  • 65 is about 13.3 percent
  • 66 is about 6.7 percent

It may be tempting to take your Social Security at age 62. Your life expectancy, cash flow needs, and spousal benefits are three keys factors that play a role in the decision to claim your benefits.

Guaranteed monthly income is great to have but claiming your benefits too early may cost you in the long run. An example of how your monthly benefits will vary depending on when you claim your benefits is shown below.

If you have an underlying health condition or reason to believe you will not live an average life expectancy it may make sense to begin taking your benefits before your full retirement age.

Your cash flow situation when deciding to take social security is another major factor. If you have enough resources (an investment portfolio, pension, or other sources of income), you can be flexible on when you decide to start receiving social security benefits. If you do not have any of these it may make sense to begin claiming benefits early.

Another strategy would be timing your benefits with your spouse. The spouse with the lower benefit is often claimed first. Upon death of the first spouse, the surviving spouse can keep the larger of their own benefit or their spouses’ benefit.


How much money will you need?

It is important to make realistic estimates about what kind of expenses you will have in retirement. Once you can estimate your living expenses it is much easier to calculate approximately how long your money will last. Expenses you should factor are discretionary and non-discretionary spending.

For the most part you cannot avoid these expenses. Examples would include:

  1. Living expenses
    This is money you need to maintain your everyday livings. Includes groceries, utility bills, and other expenses you need for everyday life.
  2. Debt
    Most common types of debt for retires would be a mortgage or car loan. Do not forget to check to see if you are able to refinance any of your debt.
  3. Taxes
    If you plan to withdrawal from your retirement accounts, it is important to factor in the tax implications. It’s common for people to pull money from their 401(k)’s during retirement. Withdrawals from these accounts will be taxed.
  4. Health Care Costs
    For people who retire before age 65 you must factor in your healthcare expenses until you are able to receive Medicare. Health care costs have risen faster than inflation and have been a large part of retiree’s budget.

Discretionary Spending
These expenses have more flexibility and are subject to your personal situation. It includes activities that you want to do and enjoy doing during retirement.

  1. Hobbies
    Retirement is when you should do what you enjoy doing most. Some examples would be golfing, painting, or fishing. Some hobbies are more expensive than others and it is important to include this in your budget.
  2. Travel
    Some people plan to travel during their retirement. This could be a quick trip to Florida or maybe traveling overseas. Budgeting in the cost for vacation spending should be factored in.
  3. Luxury
    Enjoying your hard-earned money during retirement is important. Some people may do this by dinning at fancy restaurants or buying the car they always wanted. This category varies based on your own personal desires.
  4. Legacy
    Taking care of your loved ones is often a goal of many retires. This is a broad category than can be as large as helping pay for your grandchild’s college or giving them a small gift occasionally.


What should you do?

There is no one right answer for everyone – only the one that is right for you. Retirement can have many variables and is best to plan for your unique situation.

Planning Your Retirement with PMG Wealth Management

Still have questions? Need help getting started? We have helped 250+ families in the Northwest Suburbs and are currently accepting new clients. Call us at 847-550-6100 and find out how we can help you pursue the retirement lifestyle that you have been working and saving for.

Please consult your financial advisor regarding your specific situation. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. We suggest that you discuss your specific tax issues with a qualified tax advisor. The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.