Helping Clients Dream About Rowing The Boat Gently Down The Income Stream
Most people nearing retirement hope they will be rowing gently down the stream and that their life will be a dream.
Whether that retirement is a few years off or starts tomorrow, one of the most important things advisors can do is help people convert their retirement savings to a retirement income stream. The conversions must be individualized for each client and can be fairly complicated, but the process still generally falls into 3 parts.
First, clients need to have a realistic estimate of how much they have accumulated to fund their retirement income stream. To do that, they need to have a written summary of the worth of retirement accounts, other savings accounts, real estate and any other tangible assets that they own. In addition, they need to have estimates of other sources that will contribute to their income stream, including expected Social Security benefits and payments from defined benefit pension plans.
Having this written summary may be a sort of early warning for some clients that they need to increase their rate of savings for retirement or that their desired retirement date is unrealistic.
If clients retire before becoming eligible for Social Security or pension payments, the income stream early in retirement must be generated from their own retirement accounts. Later in retirement, Social Security and pension payments will flow into the income stream. Real estate typically will not be a source of income until the latter stages of retirement, at which point, a reverse mortgage could generate income or the client can sell a primary residence to fund a move to an assisted living facility.
The second part of planning for an income stream is estimating how much that income stream will need to be. Experts say that retirees will need to have anywhere between 80% to 110% of their pre-retirement income.
The lower figure would be typical of a fairly sedate retirement and reflects savings that would occur if retirees eliminate some of the expenses associated with working such as commuting expenses or hiring others to do housecleaning or yard work that the retirees now can do for themselves. The higher figure would apply to retirees who plan on being more active or pursuing more expensive leisure activities such as extensive travel.
Rather than use generic figures to estimate retirement income needs, clients should have an actual budget based on pre-retirement spending, with any reductions (commuting expenses, for example) or additions (travel, for example) calculated in.
It is particularly important that clients budget for health insurance and health care, because their expenses in this area are likely to be considerable, even if they are covered by Medicare.
