What’s Your Retirement Account Really Worth?
In this report, you will learn:
- A common rule of thumb to estimate your future retirement income
- The 3-step process used to evaluate the real value of your retirement savings
- The ripple effect of making additional contributions to your retirement plans today
- The importance of after-tax savings for your future retirement
3-Steps to Evaluate Your Retirement Savings
Think a one million dollar retirement account is enough to retire with? That depends. Could you live on about $40,000/year? According to the commonly used “4% rule,” $40,000 is the most you could safely withdraw per year from a one million dollar pre-tax retirement account—and don’t forget you’ll need to pay your income taxes on that withdrawal as well.
In our experience meeting with faculty across the country, very few know exactly what their retirement savings will yield in terms of income. Some simply believe they will learn to get by with less in retirement. However, we’ve seen income needs actually increase in retirement due to rising healthcare costs, long-term care, relocation, or other unexpected financial needs.
This report will provide you with a simple 3-step process you can use to see if your retirement savings will provide you with enough income in retirement. You’ll also learn the value of supplemental savings plans available at most universities and the long-term impact of saving more for your retirement today.
Step 1: Review Retirement Income Projections Now
In our experience, university professionals do a great job of saving money in their employer-sponsored retirement plans and receive generous employer-matching contributions. Very few, however, take the time to regularly evaluate what level of income their retirement savings will actually generate in the future—perhaps even waiting until they are only a few months away from retirement to look at projections.
It’s unfortunate, but not uncommon for a university professor who had planned to retire, change their mind and work several years longer than they wanted to because they were disappointed with their retirement income projections. Don’t make this mistake. Check retirement projections early and often throughout your career so adjustments can be made to positively impact the end result.
True retirement projections can be complicated to generate, as one must factor in many variables like inflation, anticipated rate of return, rate of withdrawal, Social Security, investments used to generate income, etc. However, for a simple back-of-a-napkin estimate, an individual can use the “4% rule.”
The basic premise of this rule states that a retiree can safely draw 4% of their retirement savings per year without the risk of outliving their money. To use this rule, simply calculate 4% of your total retirement account(s). This figure is roughly what you could withdraw per year if you were to retire today. Divide that number by 12 to estimate monthly income. It’s important to remember that if the withdrawal is from a pre-tax retirement account, income taxes will need to be paid as well.
There are several assumptions built into this rule, including a consistent draw of 4% without any significant fluctuations in any given year, and a relatively conservative portfolio that is consistently generating interest and dividends. Those with more aggressive portfolios must be even more careful with the timing and amount of their withdrawals.
Step 2: Estimate a Retirement Budget
Will this amount (plus any Social Security benefits) be enough for you to live comfortably? That depends. Do you know what your budget will be in retirement? Will your home be paid off when you retire, or will you be making mortgage payments? Will you relocate to another state (or country) where daily living expenses are different than they are now? Will you live simply, or travel extensively?
Take some time to estimate how much money you’ll need to cover basic living expenses in retirement. Be sure to account for unexpected expenses like home maintenance, auto repairs, long-term care, as well as any legacy goals, vacations funds, or charitable gifts you plan to make during your retirement years. These estimations can be as loose or precise as desired. The intent is to measure the value of your retirement savings account in real-world terms.
Step 3: Track Savings & Adjust Your Budget Consistently
Compare your anticipated income with your estimated budget to see if you are on track. If you are pleasantly surprised, now may be a good time to evaluate your retirement goals to see if you can plan to do more for your family, your university, or special causes. If the gap between your retirement income and budget is too wide, additional contributions should be made to the retirement account(s) as soon as possible.
Small increases in retirement savings done consistently over time will result in a signiﬁcant positive impact to the overall retirement savings. This fact is due to a mathematical concept Albert Einstein once dubbed, “the 8th wonder of the world” – compound interest.
See the chart below for a simpliﬁed representation of what minor changes to retirement savings can grow into over time. If $4.50/month can become $24,000, how big of an impact could an extra $200/month make on your future retirement income?
For illustrative purposes only. Source: TIAA.
The maximum annual contribution to 403(b) university retirement plans as stipulated by the IRS is now $19,500 for 2021. If an individual is age 50 or older, they can also contribute an additional $6,500 per year bringing the annual limit up to $26,000.
If these limits are met and a university professional’s budget allows for additional savings, many universities also offer supplemental retirement plans that have separate contribution limits. Check with your beneﬁts office to see if a supplemental savings plan is available.
By consistently tracking retirement savings, making steady increases when possible, and bringing more depth and detail to a post-retirement budget, an individual will avoid the unwelcome surprise of a disappointing retirement income in their future.
Remember that the 4% rule only works when the annual withdrawals do not fluctuate. It’s common for retirees to experience years where their income needs increase for one reason or another.
Instead of drawing additional funds from a pre-tax retirement account, it can be advantageous to have after-tax savings set aside for unexpected expenses in retirement. Consider enrolling in a Roth plan through your university (if available) or begin to accumulate after-tax savings at your local bank or in a brokerage account.
One should also take into account the rising cost of healthcare and the probability of long-term care needs for one or both spouses. These costs should be built into the equation as well. To proactively plan for these expenses, one can earmark certain funds for medical expenses, accumulate assets in a Health Savings Account (HSA) if available, and seek long-term care insurance coverage while the individual(s) are still young and healthy enough to qualify.
If time is no longer on your side, contact a qualified financial planner today to help you professionally evaluate your retirement savings, create a sustainable and realistic retirement budget, and generate a plan for future medical expenses. You can speak with a member of our firm by calling 844-948-0894.
- To learn how to evaluate a financial advisor, read this report: Does Your Adviser Have a PhD in Financial Planning?
- To learn more about the importance of seeking guidance from an independent fiduciary, read this report: Who Can You Really Trust With Your Financial Future?
Savant Wealth Management (“Savant”) is an SEC registered investment adviser headquartered in Rockford, Illinois. Past performance may not be indicative of future results. Different types of investments involve varying degrees of risk. Therefore, it should not be assumed that future performance of any specific investment or investment strategy, including the investments and/or investment strategies recommended and/or undertaken by Savant, or any non-investment related services, will be profitable, equal any historical performance levels, be suitable for your portfolio or individual situation, or prove successful. You should not assume that any discussion or information contained in this document serves as the receipt of, or as a substitute for, personalized investment advice from Savant. A copy of our current written disclosure Brochure discussing our advisory services and fees is available upon request or at www.savantwealth.com. Filbrandt, the University Division of Savant Wealth Management, is an SEC registered investment advisor serving clients in academia nationally. Our advisers have specific and in-depth knowledge about university employee benefit programs and retirement plans. We work with university faculty, physicians and other professionals. We are not associated with any university or any retirement vendor and we have no access to your private retirement or personnel information.