Assessing Your Retirement Readiness: A Mid-Life Check-In
As you approach your mid-fifties, it’s essential to take a closer look at your retirement planning. With enough time left to make adjustments, now is the perfect opportunity to assess your progress and ensure you’re on track to meet your retirement goals.
The Importance of Periodic Reviews
While making consistent contributions to your retirement accounts is crucial, it’s equally important to periodically review your progress and adjust your strategy as needed. Age 55 is an excellent time to do just that, as you’ve got enough time to build wealth and make changes, but your retirement is close enough to make the issue tangible.
Understanding Your Retirement Budget
Your retirement budget consists of three main components: Social Security income, portfolio income, and spending. Let’s break down each element to better understand how they’ll impact your retirement budget.
Social Security Income
Your Social Security benefits will be based on your 35 highest-earning years. You can estimate your future benefits by contacting the SSA directly. Assuming you retire at 67 and maintain your current income, you’re likely to collect around $42,406 per year in benefits, adjusted for inflation.
Portfolio Income
With 12 years left until full retirement age, your income will depend on the value of your portfolio at retirement age and how you choose to manage that money. Let’s assume you make standard 10% contributions to your portfolio each year, giving you $8,000 per year in additional funding. If your portfolio generates an 8% rate of return, you might have around $1.4 million by age 67.
Spending and Risk Management
Your approach to risk should be based on your capacity to manage or adapt to losses, not on how much you’re willing to gamble. You can choose from various withdrawal strategies, such as the traditional 4% withdrawal strategy or investing in higher-risk assets. For this example, let’s assume a middle-of-the-road option, investing in bonds and withdrawing 5% of your portfolio per year.
Putting it All Together
With Social Security income and portfolio income, your combined annual income could be around $112,400. However, this number is likely conservative, considering you’ll draw down some of your portfolio’s principal as well as yield each year.
Will Your Retirement Budget Meet Your Needs?
To determine if your retirement budget will meet your needs, consider the 80% rule of thumb: you should expect to spend about 80% of your pre-retirement income to maintain your current standard of living. If you live on $140,500 or less, there’s a good chance your numbers will meet your budget and match your needs.
Tax Considerations and Flexibility
Remember to factor in taxes, which will cut into your gross income. You can consider a Roth conversion to avoid taxes in the future and required minimum distributions. With a comfortable retirement income relative to your current income, you have flexibility to make adjustments as needed.
Next Steps
Take stock of your retirement planning by analyzing your monthly budget, identifying areas for adjustment, and considering consulting a financial advisor to ensure you’ve planned for relevant retirement considerations based on your personal goals. With time on your side, you can make informed decisions to secure a comfortable retirement.
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