Baby Boomers are the 401(k) generation.
When Boomers started working, nearly every major company offered some form of pension providing lifetime income. Now, as members of this generation are retiring in large numbers, pensions are nearly extinct outside of government employers.
The 401(k) was invented 40 years ago and now shares the retirement landscape with Social Security. Many Boomers have a good amount of money in their 401(k) accounts, but that doesn’t mean they can stop planning. In fact, this is when critical retirement planning begins.
From just $107.88 $24.99 for Kiplinger Personal Finance
Be a smarter, better informed investor.
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Can you answer the question?
Most of us hire financial advisers or go to retirement calculators to figure out what to do. I see a real problem in the typical question (or variation) that advisers and calculators ask: “How far does $1 million go in retirement?”
Here’s my complaint: It’s the wrong question, and answers provided by advisers or calculators are nonsensical at best or dangerous at worst.
Sure, you can plan to spend a certain amount on hobbies. Another amount will go to spoiling the grandchildren. And a chunk of your savings will pay for fixed expenses like heating your residence and buying food, as well as out-of-pocket medical costs and medical insurance premiums. If you are disciplined and build in some room for inflation, that budget will work for you.
But there’s a problem with making plans based on how much you’ve saved: These calculations are based on several “average” figures. What if you are part of the 50% who live beyond their average life expectancy? Or the estimated:
- 25% who don’t get average market performance because they don’t stay the course when markets get bumpy?
- 20% or so who live well beyond their life expectancy and incur $100,000 or more in unreimbursed medical and caregiver costs?
- 10% who live through a period of adverse market performance?
Planning for the average puts lots of retirees at risk.
Speaking of another risk of the savings-focused strategy, you may have complete faith in your financial adviser, but if that person has been working with you for several years, there is little chance that he or she will still be working for you when you turn, say, 88 or 95.
Running on empty
For those people, asking “How far does $1 million go in retirement?” is the same as getting into your car for a trip from Boston to Washington, D.C. Rather than checking the mileage or traffic, you tell your passengers that we’ll go as far as the gas in the tank will take us. You also know that, depending on conditions, you might run dry in Baltimore.
Nothing against Baltimore, but I want to visit the sites in D.C. And if I live to age 95 instead of my life expectancy of 88? Planning for so-called "average growth" in my investments will leave me short in savings by seven years – not counting the extra costs that often arise late in retirement.
The right question
I advocate planning for income, not for savings. Then the question is reasonable: “Do I have enough income to retire?”
Income that is for life. Income that does not depend so directly on market performance. And income that covers your budgeted expenses.
For most of us, the only guaranteed lifetime income, in addition to Social Security, will come from any remaining pensions and income annuities that we purchase with our savings. If you accumulate $1 million for use in retirement, that’s wonderful.
To determine how to create an income allocation plan that will increase your amount of after-tax income (spendable) and reduce income volatility (dependable), put in place these three steps:
- Include income annuities as a new asset class.
- Treat your rollover IRA accounts differently than your personal (after tax) savings.
- Manage withdrawals from your rollover IRA savings rather than simply taking the IRS-mandated required minimum distributions.
In addition, here’s a case study of how one retiree used our proprietary income-planning tool to increase pre-tax income over the course of his lifetime by 32% while decreasing income volatility by 43%. That retiree will be able to spend that extra income or reinvest to generate a greater legacy for his kids and grandkids. More income with less risk is a winning strategy.
My company, Go2Income offers a calculator that will help you determine how much income your savings can generate, as well as what form of income annuity, and from which companies, would offer the best deal.
Many retirees will be OK spending down their retirement accounts. But it’s impossible to tell whether you will be one of them. The only way you can predict with certainty what kind of lifestyle you will be able to enjoy in retirement is to take responsibility for your 401(k) and make decisions around income.
-
The Most Tax-Friendly States for Investing in 2025 (Hint: There Are Two)State Taxes Living in one of these places could lower your 2025 investment taxes — especially if you invest in real estate.
-
Want To Retire at 55? See If You Can Answer These Five QuestionsWho said you can’t retire at 55? If you say yes to these questions, you may be on your way to an early retirement.
-
Potential Trouble for Retirees: A Wealth Adviser's Guide to the OBBB's Impact on RetirementWhile some provisions might help, others could push you into a higher tax bracket and raise your costs. Be strategic about Roth conversions, charitable donations, estate tax plans and health care expenditures.
-
One Small Step for Your Money, One Giant Leap for RetirementSaving enough for retirement can sound as daunting as walking on the moon. But what would your future look like if you took one small step toward it this year?
-
This Is What You Really Need to Know About Medicare, From a Financial ExpertHealth care costs are a significant retirement expense, and Medicare offers essential but complex coverage that requires careful planning. Here's how to navigate Medicare's various parts, enrollment periods and income-based costs.
-
I'm a Financial Planner: Could Partial Retirement Be the Right Move for You?Many Americans close to retirement are questioning whether they should take the full leap into retirement or continue to work part-time.
-
From Mortgages to Taxes to Estates: How to Prepare for Falling Interest RatesAs speculation grows that the Federal Reserve will soon start lowering interest rates, now is a good time to review your financial plans for housing, estate, taxes, investing and retirement to make the most of potential changes.
-
This Is How Lottery Winners Build Lasting Legacies, From a Financial ProfessionalWinning a massive lottery jackpot, like the recent $1.4 billion Powerball, requires seeking immediate legal and financial counsel, protecting your identity and winnings and planning your legacy.
-
I'm an Investment Strategist: This Is How the Fed's Next Rate Move Could Impact Your WalletInterest rate cuts might be coming, which could affect everything from your credit card debt to your mortgage. It's smart to prepare now — here's how.
-
I'm a Retirement Planner: These Are Three Common Tax Mistakes You Could Be Making With Your InvestmentsDon't pay more tax on your investments than you need to. You can keep more money in your pocket (or for retirement) by avoiding these three common mistakes.
