As an architect, you know that starting with a comprehensive plan and building a good foundation is essential for success. You would never begin a project without a blueprint and process in place – but that’s exactly what many architects do when it comes to retirement planning.
Many architects don’t know where to begin their retirement planning. The steps outlined below are important to help you address early in your career, then review and adjust periodically. An important first step should be to estimate how much income you’ll need to fund your retirement – which is not as easy as it sounds because retirement planning is not an exact science. Your specific needs depend on your goals, your lifestyle and many other factors.
Use your current income as a starting point
It’s common to discuss desired annual retirement income as a percentage of your current income. Depending to whom you’re talking, that percentage could be anywhere from 60% to 90% — or even more. The appeal of this approach lies in its simplicity because there is a commonsense analysis underlying it. Since your current income sustains your present lifestyle, reducing that income by a specific percentage that reflects expenses for which you’ll no longer be liable (e.g., payroll taxes) will theoretically allow you to sustain your current lifestyle.
The problem with this approach is that it doesn’t account for your specific situation. If, for example, you intend to travel extensively in retirement, you may easily need 100% (or more) of your current income to live. It’s fine to use a percentage of your current income as a benchmark. However, it’s also worth reviewing all your current expenses in detail to determine how those expenses will change over time as you transition into retirement.
Project your retirement expenses
Your annual income during retirement needs to be enough (or more than enough) to meet your retirement expenses. That’s why estimating those expenses is a big piece of the retirement planning puzzle. But you may have a hard time identifying all your expenses and projecting how much you’ll be spending in each area – especially if retirement is still far away. To help you get started, here are some common retirement expenses:
- Food and clothing
- Housing: Rent or mortgage payments, property taxes, homeowners’ insurance, property upkeep and repairs
- Utilities: Gas, electric, water, telephone, cable TV
- Transportation: Car payments, auto insurance, gas, maintenance and repairs, public transportation
- Insurance: Medical, dental, life, disability, long-term care
- Healthcare costs not covered by insurance: Deductibles, copayments, prescription drugs
- Taxes: Federal and state income tax, capital gains tax
- Debts: Personal loans, business loans, credit card payments
- Recreation: Travel, dining out, hobbies, leisure activities, club memberships
- Care for yourself, your parents, or others such as costs for a nursing home, home health aide, or other type of assisted living
- Miscellaneous: Personal grooming, pets, etc.
- Education: Children’s or grandchildren’s college expenses
- Gifts: Charitable and personal
- Savings and investments: Contributions to IRAs, annuities, and other investment accounts
Don’t forget that the cost of living will increase over time. The average annual rate of inflation over the past 20 years is approximately 2% according to the Consumer Price Index data (Bureau of Labor Statistics, January 2019).
It’s also important to consider that your retirement expenses may change from year to year. For example, you may pay off your home mortgage or your children’s education early in retirement. Or, you may want to travel more earlier in your retirement. Other expenses, such as health care and insurance, may increase as you age. To protect against these variables, build a comfortable cushion into your estimates as it’s best to be conservative. Finally, have a financial professional help you with your estimates to make sure they’re as accurate and realistic as possible.
Decide when you’ll retire
To determine your total retirement needs, you can’t just estimate how much annual income you need. You also must estimate how long you’ll be retired. Why? The longer your retirement, the more years of income you’ll need to fund it. The length of your retirement will depend partly on when you plan to retire. This important decision typically revolves around your personal goals and financial situation. For example, you may see yourself retiring at age 50 to get the most out of your retirement and maybe a booming stock market or a generous early retirement package will make that possible. While it’s great to have the flexibility to choose when you’ll retire, it’s important to remember that retiring at 50 will end up costing you a lot more than retiring at 65.
Estimate your life expectancy
The age at which you retire isn’t the only factor that determines how long you’ll be retired. The other important factor is your lifespan. We all hope to live to an old age, but a longer life means that you’ll have more years of retirement to fund. You may even run the risk of outliving your savings and other income sources. To guard against that risk, you’ll need to estimate your life expectancy. You can use government statistics, life insurance tables, or a life expectancy calculator to get a reasonable estimate of how long you’ll live. Experts base these estimates on your age, gender, race, health, lifestyle, occupation and family history. But remember, these are just estimates. There’s no way to predict how long you’ll live, but with life expectancy on the rise, it’s probably best to assume that you’ll live longer than you expect.
Identify your sources of retirement income
Once you have an idea of your retirement income needs, your next step is to assess how prepared you are to meet those needs. In other words, what sources of retirement income will be available to you? Your employer may offer a traditional pension that will pay you monthly benefits. In addition, you can likely count on Social Security to provide a portion of your retirement income. To get an estimate of your Social Security benefits, visit the Social Security Administration website (www.ssa.gov). Additional sources of retirement income may include a 401(k) or other retirement plan, IRAs, annuities and other investments. The amount of income you receive from those sources will depend on the amount you invest, the rate of investment return and other factors. Finally, if you plan to work during retirement, your job earnings will be another source of income.
Addressing an income shortfall
If you’re lucky, your expected income sources will be more than enough to fund even a lengthy retirement. But what if it looks like you’ll come up short? Don’t panic — there are probably steps that you can take to bridge the gap. A financial professional can help you figure out the best ways to do that, but here are a few suggestions:
- Try to cut current expenses now, so you’ll have more money to save for retirement.
- Shift your assets to investments that have the potential to substantially outpace inflation. Keep in mind that investments that offer higher potential returns may involve greater risk of loss.
- Lower your expectations for retirement so you won’t need as much money (no beach house, for example).
- Work part-time during retirement for extra income.
- Consider delaying your retirement for a few years (or longer).
AIA Trust retirement plans
The AIA Trust offers retirement savings plans and distribution options through Equitable to assist you in helping you to achieve your retirement goals. Plans can be established for one-person firms (or components)—or for many employees—utilizing a variety of retirement savings and distribution vehicles. Equitable can assist you toward achieving your goals based on more than 51 years* of experience working with association members and over 25 years with AIA architects. Equitable can help you review your options and offer you choices that can alleviate the burden of establishing and managing a retirement savings plan. It’s one of the ways that the AIA Trust makes it easier for you to focus on doing what you do best: architecture.
You may call (800) 523-1125 to speak with a retirement program specialist or learn how you can start saving.
All rights reserved. This article is prepared and published by Broadridge Investor Communication Solutions, Inc. Copyright 2019 to help keep you up to date on the issues that may affect your financial well-being. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. You should contact your insurance, legal, tax or financial professional regarding your particular circumstance.
The Members Retirement Program (group contract #6059) is funded by a group variable annuity contract issued and distributed by Equitable Financial Life Insurance Company (Equitable Financial), 1290 Avenue of the Americas, New York, NY 10104. Equitable Financial does not provide tax or legal advice. You should consult with your attorney and/or tax advisor before purchasing a contract.
Please always consider the charges, risk, expenses, and investment objectives carefully before purchasing any financial product, including mutual funds or variable annuities. For a prospectus containing this and other information, please contact a financial professional. Read it carefully before you invest or send money.
Equitable is the brand name of the retirement and protection subsidiaries of Equitable Holdings, Inc., including Equitable Financial Life Insurance Company (NY, NY); Equitable Financial Life Insurance Company of America, an AZ stock company with main administrative headquarters in Jersey City, NJ; and Equitable Distributors, LLC. Equitable Advisors is the brand name of Equitable Advisors, LLC (member FINRA, SIPC) (Equitable Financial Advisors in MI & TN). The obligations of Equitable Financial and Equitable America are backed solely by their claims-paying abilities.
GE-3457919 (2/21) (Exp. 2/23)