Are you starting to feel the pressure to have a retirement plan in place? If so, you are not alone. It seems as though the push to start planning starts from the moment you accept your first “real” job. Nonetheless, there’s good reason. One, is the simple fact that it takes so much more to live comfortably during your retirement years today than it did just a couple of generations ago. With that in mind, when should you really start retirement planning?
How Retirement Planning Has Changed
If you are at the start of your working years, retirement planning will be very different for you than it was for your grandparents or great-grandparents. During earlier generations’ working years, the average person could expect to depend on Social Security. It was seen as a primary source of retirement income. However, with the future of the Social Security program uncertain, today’s workers cannot count on that future income. Moreover, the income you do receive (assuming the program is still alive) will not go as far as it once did toward supporting you during your retirement years.
For 2019, the maximum Social Security retirement benefit is $3,770 per month. Furthermore, only people who had maximum earnings prior to retiring qualify for that amount. The average monthly benefit is only around $1,461 per month. Operate on the assumption that you will need between 70-80 percent of your current monthly income during your retirement years. It becomes strikingly clear that relying on Social Security retirement benefits will not suffice. Thus, the focus on retirement planning early on in life makes logical sense.
How Much Do You Need for Your Retirement?
This is where retirement planning can get confusing. Experts do not always agree with each other about how best to calculate what you will need for your retirement. A few basic theories, however, seem to be generally accepted, including:
- If you plan to remain in the same city and home, you will be able to live on about 80 percent of what you live one now when you are retired. If, for example, your monthly expenses now are $6,000, you would need $4,800 a month if you were retired.
- Take what you need yearly and multiple by 25, assuming the average person lives 25 years after retirement.
- Assume a cost of living increase of 3-5 percent each year.
- Factor in an emergency fund equal to at least three months on living expenses.
How Does Retirement Planning Fit into Your Estate Plan?
Retirement planning gets even more complex when you combine it with estate planning; however, failing to consider them together is a risky way to see both plans fail. Because of the natural overlap between these plans, it is best to include everything in one “master” plan. A comprehensive estate plan does just that. Although the primary focus of your estate plan may be the distribution of estate assets after your death, a well thought out estate plan should also include current financial planning as well as retirement planning. After all, if you fail to protect and grow your assets while you are here, there will not be any assets left to distribute when you are gone.
Moreover, by creating a comprehensive plan, you can often accomplish several goals at one time. For instance, you might be concerned about the high cost of long-term care and your inability to cover those costs unless you can qualify for Medicaid. To do that, you must remove valuable assets from your estate now so they do not cause you to be found ineligible for benefits. A Medicaid trust might be the answer. That same trust may be able to provide you income during your retirement years.
The key to a successful retirement plan is to start early and plan for all possible contingencies. Moreover, your retirement plan needs to be incorporated into, not be separate from, your overall estate plan in order to create a comprehensive plan.
For additional information regarding the retirement planning process and how it should interact with your estate plan, contact the experienced Texas estate planning attorneys at The Mendel Law Firm, L.P. by calling 281-759-3213 to schedule your appointment today.