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Over the weekend, I was talking with some (old-man hockey) friends, and a common theme emerged.
My friends are worried about the stock market, about the recent volatility, and what the prospect of a trade war, or a recession, or interest rate hikes, or a war in the Middle East might have on their nest eggs.
And they worry about whether they will be able to retire as planned this year, given what's happening to their life's savings.
I began to think about what happened in 2000 when many older workers retired only to experience the tech bubble/dot-com implosion. And I thought about what happened in 2008 when older workers retired, only to face the Great Recession.
In both those situations, retirees watched the value of their nest eggs decline and their plans to maintain their pre-retirement standard of living throughout their retirement get quashed. In some cases, the newly retired had to live on less, or had to go back to work -- or both.
So what can my friends and others who are at retirement's doorstep do to make sure they don't repeat the School of Hard Knocks' lessons from previous generations of retirees?
Also in our retirement section: Working Longer Works Better Than Saving More Money for Retirement
What Are Your Retirement Expenses?
It starts with knowing what your essential and discretionary expenses are today and what those expenses will be in retirement. How much do you, and will you, spend on housing, healthcare, transportation and the like? How much will you spend on travel, on gifts to grandchildren, and on hobbies?
If you haven't put finger to calculator or pencil to paper, I don't care how much you have saved in your nest egg. You are not ready to retire.
By the way, for reference, housing represents, on average, nearly 35% of all expenses in retirement for those age 65 or older; transportation, 15%; healthcare, 13%; and food, 12.4%. In all, those four components represent 75.6% of expenses.
What Are Your Sources of Income?
It's likely you'll likely have three or four sources of income in retirement.
On average, Social Security represents one-third of income for those age 65 or older; earnings represent 32.2%; pensions, 20.9%; and asset income 9.7%. Those percentages shift, however, quite dramatically depending on your income quintile. For instance, for those in the highest income quintile, Social Security represents just 15% of income; earnings, 45%; pensions, 22%; and asset income, 14%.
By way of background, the average Social Security benefit check is about $1,400 per month today, or $16,800 per year, but the highest income beneficiaries are receiving $2,788 or more per month, or $33,456 more per year.
Just as you did with your expenses, start figuring out what your income will be in retirement and from what sources.
Calculate Your Retirement Readiness
As part of this exercise, you'll want to calculate your retirement readiness -- that is, whether you'll have income to pay for your retirement expenses. The salary replacement ratio is one method.
Will you be able to generate enough income -- from Social Security, from earned income, from your pension and personal assets -- to replace 80% of your pre-retirement salary? If so, you're in good shape to retire.
By the way, although it's less than perfect, use a 4% withdrawal rate to calculate how much money you'll be taking from your retirement accounts each year. If you must take much more than that to maintain your pre-retirement standard of living throughout your retirement, you will need to make some adjustments.
You might need to retire later, trim your retirement lifestyle; and/or generate more income from other sources. On the other hand, if you can take 4% or less to fund the 25% of your expenses that don't include housing, healthcare, transportation, and food, you're likely in very good shape.
Of note, there are some in the retirement-income world who now say using a reverse mortgage is yet another way to, if nothing else, generate income -- especially when the markets are down, and you want to avoid sequence-of-return risk.
Match Guaranteed Sources of Income with Essential Expenses
There are also some in the retirement-income planning world, including Farrell Dolan, a retirement planning consultant, who say you should cover your essential expenses in retirement with guaranteed sources of income, such as Social Security, defined-benefit pensions, and annuities. Then you can use your less-certain, or riskier, assets (such as stocks) to pay for discretionary expenses. He calls this the four-box strategy.
And if there's a gap between guaranteed sources of income and essential expenses, consider converting a portion of the risky assets (stocks and bonds) in your retirement accounts into guaranteed sources of income, such as an income annuity. By doing so, you've given up some growth and possibly some inflation protection, but you've also guaranteed the standard of living you desire throughout retirement.
Create a Retirement Income Policy Statement
That last thing to do before you worry about whether you can retire is to create a retirement income policy statement. Such a statement -- much like an investment policy statement -- will outline your plan for investing and withdrawing your money from your retirement accounts, and when you will make adjustments or course corrections to your plan. Such a statement will also take the emotion out of what can be an emotional experience.
Should You Be Worried?
Should you worry about what's going on in the market? I say you should worry if you haven't taken the time to tackle the strategies and goals listed above. But if you have not, you should -- instead of worrying -- get to it and complete those tasks.
Worrying just means you haven't planned. Worrying means that you are relying far too heavily on risky assets to fund your lifestyle. Worrying means that you shouldn't retire just yet. So, stop worrying and start figuring out the solutions. If you insure coverage of your essential expenses, you'll have fewer things to worry about, and stock market volatility won't be among them.
Subscribe to Retirement Daily to learn more about saving for and living in retirement. Got questions about money, retirement and/or investments? Email Robert.Powell@TheStreet.com