Don’t Wonder If You Have Enough for Retirement, Find Out

The following column from Phoebe Venable, CapWealth Advisors President & COO, appeared in The Tennessean on March 10, 2017.

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The most important long-term financial goal for everyone is to save for retirement. Or it should be. As a financial adviser, the single question that I hear more than any other is “do I have enough?”

The answer isn’t always simple. It depends on age, income, the performance of investments, life expectancy, location, lifestyle and the legacy we may want to leave others. You fold all of those into the equation and develop a plan. The younger we are when we start, of course, the better the odds are of achieving our retirement goals. But all too often, people don’t really start planning for retirement until they begin to see it looming on the horizon. Better late than never, but far from ideal.

Do you have enough?

Let’s say you’re 55 and Monday morning your employer offers you an early retirement package (a strategy companies sometimes use to trim their payroll costs without firing anyone). I advise you take a deep breath and consider carefully.

The average life expectancy, according to data compiled by the Social Security Administration, is 84 for men and 86 for women. But those are averages. About one out of every four 65-year-olds today will live past 90 and one out of 10 will live past 95. If you retired at 65, would your retirement savings support you for 30 years? Retiring at 55 adds another decade.

Two key components: spending and earning

Retirement planning hinges on two key components — how much you spend and how much your savings earn during retirement. Financial advisers use financial-planning software programs to map out your financial future but any financial plan is only as good as the information used to create it. One common mistake is to underestimate how much you’ll spend when you retire. The younger you are at retirement, the more you’re likely to spend. When asked, most people would say they expect their living expenses to go down in retirement, but that isn’t always the case. The Employee Benefit Research Institute (EBRI) found that 46 percent of households spent more money, not less, during their first two years of retirement.

Have a good financial plan

In my personal experience as a financial adviser, no one accurately estimates what they will spend in retirement when they retire early. Young retirees with newfound time on their hands are far more likely to travel, undertake larger home projects, begin new hobbies, etc. At age 55, you could have 10 years of health insurance expenses until you are eligible for Medicare. Social security benefits can begin at age 62 but you won’t receive your full benefits until age 66, 11 years after early retirement at age 55. A good financial plan will provide the budgeting framework you need to stay on track — regardless of your retirement age.

A financial plan is not a static document. It’s not an exercise that you complete once and put on the shelf. Every financial plan needs to be updated annually, especially during the first few years of retirement as you settle into your new phase of life. If you spend more than you expect in any given year, you make adjustments.

If you are considering retirement, don’t just wonder if you have enough. Find out. There are essentially two ways to improve the results of a financial plan: earn more or spend less. A good financial adviser will help you find the right balance between the two.

Phoebe Venable, chartered financial analyst, is president and COO of CapWealth Advisors, LLC. Her column on women, families and building wealth appears every other Saturday in The Tennessean.