By Jon Powell, CFP®

One of the most important things to consider when planning for retirement is what kind of lifestyle you want to live. Retirees are rarely interested in giving up all their worldly possessions and moving to a remote island in the Pacific. Most people love the lives they’ve built for themselves and want to keep their lifestyles relatively the same in retirement. Without an income from a job, retaining the same lifestyle is no longer as easy, but it’s not impossible.

With proper planning and wise investment decisions, you can minimize the uncertainty around retirement. Here are four factors to keep in mind.

Identify Your Income Sources and Manage Fragmentation

Before assessing what type of lifestyle you can lead in retirement, you must first identify where your retirement funds will be coming from. Common sources include:

  • Qualified retirement accounts such as 401(k)s, 403(b)s, and 457(b)s
  • Traditional or Roth IRAs
  • Health savings accounts (HSAs)
  • Social Security benefits
  • Investment portfolios
  • Life insurance policies
  • Annuities

If you’re like many American workers, you’ve probably worked for several different companies throughout your career and you may have multiple retirement accounts that are not consolidated. This is called fragmentation, and it can eat into your income stream by causing larger tax liabilities. 

For instance, all qualified retirement accounts (except Roth IRAs) have required minimum distributions (RMDs) once you reach age 72. This means you are obligated to withdraw and pay taxes on a certain amount each year. If you have three accounts with RMDs, but you can easily survive off of just one distribution, you can end up paying taxes on two income streams that would have been better left undistributed.

Fragmentation can be alleviated by merging your accounts through consolidation. This will allow you to take one RMD instead of three, thereby saving you money on taxes and keeping your funds invested longer. It’s important to note that there are very particular rules surrounding consolidation and the process should be reviewed with a professional whenever possible.

Where Is Your Money Going?

Our clients often come to us with concerns about how soon they will be able to retire, whether they can maintain their desired lifestyle, and how to make sure they won’t run out of money. A crucial part of answering those questions comes from budgeting and tracking expenses.

Without understanding your retirement needs, there is simply no way to assess where you stand. It’s important to record every expense you can realistically estimate, including basic living expenses, mortgage and debt payments, life insurance, health insurance, and long-term care. 

It’s often said that retirees should plan to spend about 80% of their pre-retirement income on their post-retirement lifestyle, but, in practice, that number is very subjective. The amount of income required largely depends on the type of lifestyle you want to lead, which is even more of a reason to plan ahead. 

Assess Your Level of Risk

Once you have a complete picture of your finances, you will be able to determine whether you’re on track for retirement. At this point, you can evaluate the level of risk in your portfolio and make any necessary adjustments. 

If you find that you are not on track for the lifestyle you want to lead, you can consider investing in riskier assets with the hope they will earn a bigger return or you can extend your retirement timeline. 

Conversely, if you find you are on track for retirement, you can consider reducing your overall level of risk and invest in more conservative assets. Either way, your risk tolerance is just one aspect of your full financial situation, and, as such, it must be analyzed as one piece of a much larger puzzle.

Review Your Plan

Lastly, be sure to review your retirement plan annually so you can make adjustments as needed. Try as we might, we simply cannot plan for everything, and partnering with a trusted advisor can help keep you on track no matter what pops up. 

At Ferguson Johnson Wealth Management, we can help you navigate the road to retirement. If you’re ready to review your retirement needs, reach out to us today! Call us at 301-670-0994 or email us at djohnson@fjwealthmanagement.com

About Jon

Jon Powell is a financial planner and portfolio manager at Ferguson Johnson Wealth Management, an independent, fee-only fiduciary firm that has been helping clients plan for and enjoy retirement for more than 40 years. With more than 10 years of experience, Jon is passionate about providing unbiased advice that puts his clients first. He considers it a privilege to carry some of the financial burden for his clients and educate them so they can make empowered decisions for their futures. Jon is also the primary author and curator of the Ferguson Johnson Wealth Management blog. 

Jon graduated from Virginia Polytechnic Institute and State University with a bachelor’s degree in financial planning and holds the CERTIFIED FINANCIAL PLANNER™ certification. When he’s not serving his clients, you can find Jon spending time with his wife, Erica, and their pets, a black lab named Nugget and an orange tabby cat named Kiwi. He loves to play tennis and golf and won’t turn down a good board game. Jon is a diehard fan of D.C.-area sports teams; you might see him at a Washington Nationals game. To learn more about Jon, connect with him on LinkedIn.

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