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This Formula Could Help Predict Your Retirement Readiness
Greg Lavelle • August 6, 2020
Most of us become eager to retire as we enter our sixties, but feelings of uncertainty are common too. You might wonder whether your monthly income will be sufficient to support your lifestyle, and you might be particularly worried about how long your savings will last. Those are common emotions, and it’s smart to investigate those issues before taking the leap into retirement.
That’s why many financial experts have long promoted the “four percent rule”. This rule revolves around the idea that retirement income will be derived from two sources (Social Security benefits and withdrawals from a retirement savings account), and that annual withdrawals of about four percent should be sufficient for most people. Theoretically, your money should last for the rest of your expected lifespan, so that you have enough income each year and it lasts for the rest of your life.
But does that formula work for everyone? According to research by Fidelity, this plan will work for a 30-year retirement about 90 percent of the time. In other words, it will work for most people, but there’s about a 10 percent chance that you could outlive your money.
The four percent rule, therefore, could be viewed as a good starting guideline for retirement planning. But certain factors will impact the validity of that formula in individual cases, such as:
Age at which you retire.
If you retire at 60 and live until age 90, that’s a 30-year retirement. But what about those who live past 90? Or those who retire earlier, due to economic factors, eagerness, or some other reason?
Your cost of living.
Some people are naturally more frugal than others. Some are still paying for expensive mortgages or their children’s college expenses. Some wish to pursue travel or expensive hobbies in retirement, while others look forward to downsizing into a tidy condo in a low-cost area. Your own preferences greatly influence your income needs in retirement.
Your savings.
Four percent of $100,000 is $4,000… But four percent of $2 million is $80,000. Not many people could live off of $4,000 a year, but most would find $80,000 to be perfectly reasonable. Therefore, you can only rely on the four percent formula to the extent that a reasonable budget allows.
On that note, make an appointment with us to discuss your savings rate and retirement readiness. We can help you calculate factors like potential Social Security benefits, life expectancy, withdrawal rates and more. Then together we can set a target retirement date and savings goal.
As a business owner, safeguarding your enterprise against unforeseen events is crucial for long-term success. Life insurance offers several strategies to protect your business, ensure continuity, and provide financial stability during challenging times. Two primary methods are buy-sell agreements and key person insurance. Buy-Sell Agreements A buy-sell agreement is a legally binding contract that outlines the procedure for transferring ownership if an owner departs due to death, disability, or retirement. Funding this agreement with life insurance ensures a smooth transition and financial security for the remaining owners and the departing owner's beneficiaries. Types of Buy-Sell Agreements Cross-Purchase Agreement: Each owner purchases a life insurance policy on the other owners. Upon an owner's death, the surviving owners use the policy proceeds to buy the deceased owner's share. This method is often suitable for businesses with a few owners. Entity Purchase Agreement: The business itself owns life insurance policies on each owner. If an owner passes away, the business uses the proceeds to buy back the deceased owner's share, redistributing it among the remaining owners. This approach is typically preferred for businesses with multiple owners. Key Person Insurance Key person insurance is a policy that a business takes out on essential employees whose loss could significantly impact operations. The business owns the policy, pays the premiums, and is the beneficiary. If a key person dies or becomes disabled, the policy proceeds can be used to: Cover the costs of finding and training a replacement. Offset lost revenue resulting from the key person's absence. Reassure clients, creditors, and investors of the business's stability. This strategy is vital for businesses where certain individuals are integral to success, such as top executives, lead developers, or primary sales personnel. Additional Strategies Beyond buy-sell agreements and key person insurance, consider these life insurance strategies: Collateral Assignment: Use a life insurance policy as collateral for business loans. In the event of the owner's death, the lender is paid from the policy proceeds, preventing financial strain on the business. Executive Bonus Plans: Provide key employees with life insurance policies as part of their compensation package. This not only offers them personal financial protection but also serves as an incentive for retention. Deferred Compensation Plans: Promise to pay key employees a certain amount at retirement, funded through life insurance policies. This ensures the business can meet its obligations without affecting cash flow. Implementing life insurance strategies is essential for business owners aiming to protect their enterprises from unforeseen events. Work with us to explore your life insurance options and we can help your business remain resilient and continue to thrive.
Term life insurance provides coverage for a specified period, such as 10, 20, or 30 years. If you outlive your term policy, the coverage ends, and no death benefit is paid to your beneficiaries. As you approach the end of your term, it's essential to evaluate your current financial situation and consider options to maintain life insurance coverage if needed. Options to Consider Annual Renewable Term: Some term policies offer an option to renew annually after the initial term expires. While this allows you to extend coverage without a medical exam, premiums typically increase each year based on your age, making it a potentially costly option over time. PROGRESSIVE.COM Policy Conversion: Term-to-Permanent Conversion: Many term policies include a conversion feature, allowing you to convert your term policy into a permanent life insurance policy, such as whole or universal life, without undergoing a medical examination. This option can provide lifelong coverage and build cash value, but premiums will be higher than those of the original term policy. NEWYORKLIFE.COM Purchasing a New Policy New Term Policy: Applying for a new term life insurance policy can be an option, especially if you're still in good health. However, premiums will be higher due to increased age, and you may need to undergo a medical exam. Permanent Life Insurance: Alternatively, you might consider purchasing a permanent life insurance policy, which provides lifelong coverage and accumulates cash value. This option is generally more expensive but offers additional benefits. Exploring Alternative Coverage: Final Expense Insurance: Designed to cover end-of-life expenses, such as funeral costs and medical bills, final expense insurance offers a smaller death benefit with more affordable premiums and may not require a medical exam. Guaranteed Universal Life Insurance: This type of policy provides coverage for a specified age (e.g., up to age 90 or 100) with lower premiums compared to whole life insurance, focusing primarily on the death benefit without significant cash value accumulation. Take Action Now As your term life insurance policy nears its expiration, assess your current financial needs and health status to determine the most suitable course of action. Consulting with an insurance professional can help you navigate your options and select the best solution to ensure continued financial protection for your loved ones.
