To say the last year has been unprecedented might be the understatement of the century. It is hard to imagine anyone who has not been impacted in some manner, some far more than others, by the pandemic. Personal finances are no exception as the volatility of the past year remains front and center for many despite recent market recovery.
However, something interesting is happening. Many people are doing what their financial professionals have been asking them to do since their first appointment! They are paying closer attention to their current and future finances. In fact, according to our 2021 Allianz Retirement Risk Readiness Study, two-thirds (65%) of those surveyed said they are paying more attention to what they are saving and spending, and nearly six-in-10 (58%) have cut back on their spending.
This is, no doubt, a step in the right direction. But — and there is always a “but”— risk readiness needs to be about much more than saving and spending. Although it’s understandably a good immediate approach, given the current environment, there is more to consider, specifically the long term. It might seem difficult to look at now, but retirement planning still needs to remain top of mind.
One area that is often overlooked in accumulating assets that deserves much more attention is income planning. Income planning is ensuring you have enough funds to support your lifestyle throughout your, and your spouse’s lifetime. The value of income planning should never be underestimated. Without a written plan, which is regularly updated, your retirement dream is nothing but a work of fiction. However, a few simple steps now will set you up for future success. You’ll be much more confident when you reach the retirement reality and embark upon the next chapter of the story of your life.
Know your retirement risks
Significant events are often the triggers that convince people to take a more proactive approach. The pandemic is no exception. It exposed a whole new level of financial risks many people hadn’t recognized.
While it is fresh, use this same lens and think about risks in retirement: longevity, inflation, market volatility, the list goes on and on. We’re reminded of the day-to-day risks that pop up in retirement, such as increased health care needs and mobility issues. This “discovery” phase may be a painful reality check, but it is Step No. 1 in addressing your future income needs.
Review your expense categories
While it is sometimes difficult to predict your retirement spending, using your current expenses as a baseline is a great way to estimate expense categories. As a general rule, your essential expenses, such as food, clothing, shelter and health care costs, take priority over discretionary and legacy spending and require reliable guaranteed income. After all, you must cover essential expenses regardless of market conditions or other factors.
Identify your income sources
While retirement income can come from a variety of sources, most people immediately think Social Security. It is important to know all of the options when filing for Social Security benefits in order to get the most out of them. However, Social Security alone will not provide a complete source of retirement income.
Uncover any potential income gaps
Which brings me to the next point. If, by factoring in Social Security and pension income (if any) you discover that you don’t have sufficient guaranteed income to cover your essential expenses, you’ve uncovered a retirement income gap. This might be jarring, but it is actually good news, as you now know what needs to be done and can get ahead of the situation now rather than having an unpleasant surprise in retirement.
Develop a tailored solution
Working with your financial adviser, you can create a retirement income plan that could cover your essential expenses as well as potentially enhance your discretionary and legacy income. You will want to figure in things like travel, hobbies and other “fun” expenses in addition to the essentials. Retirement shouldn’t be something that is survived but something that is enjoyed.
If you, indeed, have the dreaded income gap, there are several products, such as annuities, that can help you put in place an additional stream of guaranteed income to help cover your needs. (Remember that guarantees are backed by the issuing insurance company.)
There seems to be light coming at the end of the proverbial tunnel. While it might not be an easy mindset…