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Income in Retirement

5 Questions for Planning Your Retirement Income

How long will you need retirement income? Longer than you think.

Articles by Betterment Editors

By the Editorial Staff
Betterment Resource Center  |  Published: May 27, 2014

Retirement income may need to last decades past your retirement date.

Betterment's globally diversified, low-cost portfolio balances risk and reward for retirement income.

Retirees tend to make three big investing mistakes, says Tim McCarthy, author of the recently published finance book The Safe Investor. First, they make big buy and sell moves with lump sums, rather than dripping money in and out of investments; they don’t take enough portfolio risk after they’re retired; and they over-rely on friends and family for investing advice.

McCarthy is not just another personal finance author writing another book on investing. Instead, he’s revealing insights gleaned from his four-decade career in the top ranks of asset management, including serving as president for both Fidelity Investment Advisor Group and Charles Schwab.

It turns out many of the trouble-areas McCarthy points to are the same issues we’ve been working hard to solve with automation here at Betterment. Guided by behavioral economics and data, our new retirement income service is designed to balance risk and reward for the retiree in a globally diversified portfolio—and trickle income in and out with automatic dividend reinvesting, rebalancing and auto-withdrawals. We spoke with McCarthy about other key factors all savers should consider as they plan for retirement.

1. How much will you need?

There are many formulas out there to help you ballpark the number—but there is no one magic number that works for everyone. Only one truth: “When you get into retirement you can’t make your savings again,” says McCarthy.

That means saving early, saving often, and investing well. But there’s more. It’s also about having a realistic outlook on inflation, and how that factors into the amount you need. If you have been using the one million dollar-mark as your savings goal, factor in your estimated retirement date for the full picture of how that amount translates into income.

For example, a 65-year-old American who retires today with one million dollars in retirement savings (not including Social Security benefits) and earns a 6% return on average, assuming the savings need to last 20 years, can expect to withdraw around $6,000 per month using Betterment’s retirement income service.¹ But consider what a 20-year-old today will have to save in order to retire with that same lifestyle in 45 years, assuming a 3% rate of inflation: nearly $4 million.

2. How long will you need it to last?

Longer than you think.  The average life expectancy for someone United States is 78.7 years, according to data from the Organization for Economic Co-operation and Development. But in reality you may well live another 15 years past that age.

“People erroneously look at the average but if you’re 60 and healthy, chances are you’re going beyond 90,” he says.  “You have to assess the fact that if you retire at 65,  you need your money to keep growing.” “You have to assess the fact that if you retire at 65, you need your money to keep growing.”

3. What if something unexpected happens?

You can’t plan for the unexpected—but you can do your best to put all the financial planning in place before something happens. That means getting all the necessary paperwork lined up—instructions for accounts, investments, trusts, and other financial planning.

McCarthy also suggests setting up a safety net fund as a healthcare supplement—this is a fund exclusively for unexpected medical expenses that could come near the end of life. He suggests between $50,000 and $100,000 in a separate pool from retirement income accounts.

“People fear more than anything else being a burden in the end—so you just don’t want to run out six months before dying.”

Learn more about investing in a safety net fund.

4. What am I really going to be spending?

Your burn rate may be considerably different when you get into retirement—compared to when you are in your 40s and 50s. Much of the infrastructure for life has already been bought and paid for (education, home, furniture, clothing, art, real estate, and so on.)

However, health care costs loom. The average American couple who is healthy and planning to retire next year will have healthcare costs of more than $366,000 over their lifetime, according to data from HealthView Services, a data reporting company for health care costs. In another 10 years, that number could rise to more than $420,000 in today’s dollars with health care cost inflation.

“If you already have a good life, you don’t need to do it again,” he says. “If people do start to panic and think they are coming up short, then you have to look at part-time jobs and lower spending combined with the right risk-adjusted portfolio.”

5. How should I be invested?

McCarthy says one of the biggest mistakes retirees or near-retirees make is being too risk adverse in their investments. In his experience, he says, new retirees tend to become overly conservative at first because they panic without the security of a paycheck. But the reality is they still need risk. And in today’s markets, that means looking to international investments in countries experiencing growth.

“Americans still look at non-developed markets as speculative and risky and it’s a problem for American portfolios,” he says. “Retirees need to be international in their investing. It’s an important part of their portfolio.”

Learn more about Betterment’s globally diversified portfolio.

Try our Retirement Savings Calculator

You can see if you are on track for retirement with given your age, income and savings with our calculator.

¹Betterment’s retirement income advice automatically factors in an inflation rate of 3%.

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