The Two-Thirds Retirement Plan: Do You Have Enough Guaranteed Income?
Written by
Nicole Spector
Edited by
Ashley Almario
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What should be a basic human right has become an unaffordable luxury for many. We’re talking about retirement, a reality that millions of Americans struggle to cover.
Part of the reason retirement is so difficult to prepare for is it’s hard to plan for the unknown. We can’t know precisely how long we will live or what hardships we will endure in our senior years. Additionally, formidable economic forces like inflation and recessions can easily throw even the most concrete of plans off kilter. But we must plan for the future, and one sensible approach is the two-thirds retirement plan.
With the two-thirds retirement plan, guaranteed retirement income (i.e., their Social Security, pensions and annuities) is used to pay for two-thirds of living expenses during retirement. The additional third of living expenses is funded via non-fixed income (e.g., investments and retirement savings).
It’s a solid plan, but how do you know whether you have enough guaranteed income to safely execute it?
Do the Math
It’s time to break out the calculator and do some math in order to get a bare idea of what you’ll need to cover two-thirds of your expenses during retirement.
“Start by identifying your fixed sources of retirement income, such as Social Security, pensions and annuities,” said Michael Ryan, a financial coach. “Add up the total amount of guaranteed income you expect to receive each month. Next, estimate your monthly living expenses, including everything from housing and food to healthcare and leisure activities. Multiply your total monthly expenses by two-thirds.”
Be sure to add lots of wiggle room, especially when it comes to leisure activities. You don’t want to be living paycheck to paycheck in retirement if you can help it.
Envision What You Want Your Retirement To Look Like
This next step may be tricky, especially if you’re still a ways off from retirement, but try to really think about what you want your retirement to look and feel like.
“I tell every person I work with to pretend that tomorrow is their retirement day,” said Robert A. Massa, ChFC, CEBS, CPFA, AIF, CHSA, CBC, managing director of retirement in Houston for Qualified Plan Advisors. “If they want to live just like they are living now, they need to pay themselves at least 80% of their regular paycheck in order to maintain their standard of living.
“From there, they have basis to work with and then they can start to ask themselves what else they want from retirement and add those costs in. Then you can project forward using inflation and come up with a monthly and annual income goal and work from there.”
To an extent, it’s really just a matter of knowing what you need.
“Then you can start planning how to grow toward that income base,” Massa said, “and start planning toward either a guaranteed income number through the purchase of an annuity or a projected income through an investment strategy.”
Aim for 100%, Instead of 2/3
Under the two-thirds retirement plan, you need just two-thirds of your guaranteed retirement income to fund your living expenses. But don’t think like that; instead, pretend you need all of your fixed retirement income to get by.
“I like to advise clients that they should have guaranteed income via a pension, Social Security or annuity that covers 100% of their minimum lifestyle expenses,” said Mike Hunsberger, ChFC, CFP and owner of Next Mission Financial Planning. “I define minimum lifestyle expenses as their housing, healthcare, food and minimum transportation costs. This will vary greatly. Some will say their minimum lifestyle is eating out five times a week or it requires two nice cars versus one older car. Establishing this will let you know how much income you need.”
One of the challenges, Hunsberger said, is that — unlike Social Security — pensions and annuities typically aren’t indexed to inflation.
“That means [you] may need to reserve additional money that could be turned into income in the future — via an annuity or other guaranteed income products,” Hunsberger said.
Get a Customized Financial Plan
The truth of the matter is that everyone’s situation is special. Your retirement will inherently look different from your next door neighbor’s, even if you are the same age and your houses are virtually identical; therefore, it may be worth it to have a customized two-thirds retirement plan carved out for you and only you.
“Everyone’s situation, wants and needs are unique,” said Drew Parker, creator of The Complete Retirement Planner. “That’s the most important point to consider. To know, with reasonable certainty, how much will be needed to comfortably retire, every household, regardless of their net worth or stage of life, owes it to themselves to create a comprehensive, individualized financial plan. This is a crucial step in assessing your current and future financial health and acts as a roadmap to becoming financially secure.”
It will show, year by year, how quickly you are able to pay off debt, how much is really needed to save for retirement, how long it will take to reach your goals and what you can do to influence the outcome.
Having the opportunity to see your financial future in plain black and white — based solely on your own information and no one else’s — can be a real self-esteem booster.
“It will give you the confidence to make the best possible financial decisions for your future,” Parker said. “You can do this on your own with a comprehensive financial planning tool, or you can hire a financial advisor to do it for you, but it is the most important step that you can take to gain real, actionable answers regarding your financial needs.”
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