Principles for a successful retirement - J.P. Morgan Asset Management

Principles for a successful retirement

Learn the seven principles for a successful retirement

1. Create the plan you need for the retirement you want

Define your goal and craft a plan—know your checkpoint

A retirement plan doesn’t have to be daunting—it’s important to just get started. Once you know where you’re heading, a comprehensive retirement plan is like any good GPS. It helps you get and stay on track to your destination—even as your life, the markets and the economy change.

The retirement savings checkpoint tells you how much you should have invested today to be on pace toward maintaining your current lifestyle through 30 years of retirement. If you’re below your checkpoint today or have a very different vision for your retirement tomorrow, you may need to work with a financial professional to adjust your plan. Be sure to review and update it regularly.

Save, save, save

A key factor in achieving a successful retirement is to save as much as possible during your working years. Your checkpoint assumes that you save 10% of your gross annual income each and every year—nearly twice the average annual savings rate in America. The good news is that you are in complete control of how much you save, and your employer may help with a company match, so make savings a priority.

Retirement Saving checkpoints Household income >$100k

Goals-based wealth management

2. Use time to your advantage

Save and invest based on your time horizon

All goals are not created equal, so investing for them as one may not be the best plan. Instead, decide how much of your savings to put toward college, retirement and other goals based on your priorities. Next, create an investment strategy that allows you to take advantage of the longer investment horizon for goals with longer time frames. To keep your strategy on track, be sure to have a short-term fund that can cover emergencies without having to sell your investments during down markets.

Good things come to those who wait

While markets can always have a bad day, week, month or even year, history suggests investors are less likely to suffer losses over longer periods.

3. Plan for a long life

The longer you live, the longer your investments must last

At least one member of a 65-year-old couple now has a 90% chance of living to 80 or beyond, a nearly 50/50 chance of reaching 90 and a one-in-five chance of turning 95 or older. Living longer affects key retirement decisions such as how to make the most of your time, how to invest, when to claim Social Security and whether you might need long-term care.

If you're in good health at 65 and have a family history of longevity, your retirement plan should conservatively account for 30 or more years of living expenses. That means your investments need to continue growing long after you stop working to keep pace with inflation and reduce the risk of outliving your money.

Life expectancy probabilities

Social Security timing tradeoffs

4. Make an informed decision about Social Security (Part 1)

Social Security pays you more for waiting

Social Security benefits are calculated based on your 35 best earning years. You are eligible for 100% of your benefit at your Full Retirement Age (FRA). Individuals born in 1954 and earlier have an FRA of 66. Claiming at 62 will permanently reduce your benefit by as much as 25%. Waiting to claim after FRA gives you an 8% increase each year in your benefit amount for a maximum of 124% or more.

Times they are a-changing

Individuals turning 62 in 2020 will have an FRA of 66 and 8 months as a result of the Social Security Amendments Act of 1983. This Act moves FRA 2 months each year for 6 years until it reaches and stays at age 67 in 2022. An FRA of 67 results in even less if you claim early and not quite as much at age 70.

4. Make an informed decision about Social Security (Part 2)

How long until waiting pays off?

Should you take smaller amounts sooner? Or wait for larger amounts later and rely on your portfolio in the meantime? If your goal is to maximize your cumulative benefit, the answer depends on how long you live. You would receive more in total at age 76 by claiming at FRA (66 and 8 months) rather than 62, and at age 80 when choosing between FRA and 70.

The odds of receiving more by waiting are in your favor

Because of the relatively high probability of living to 76 and 80, particularly if you are married, delaying Social Security often pays off in the long run—especially if you are the primary wage earner of a couple and your portfolio gives you that flexibility.

Cumulative individual maximum benefit by claim age

Rising annual health care costs in retirement

5. Know what to expect with health care costs

Plan on rapidly rising expenses

Medical expenses tend to rise sharply throughout retirement as we grow older and require more care at higher prices. Out-of-pocket costs for an average 65-year-old retiree on traditional Medicare are projected to more than triple from around $5,300 this year to over $17,000 by age 95.

These costs are averages per person and do not include most long-term care. Costs may be much higher if you have expensive prescriptions. And you’ll pay more in Medicare premiums if your income is higher. Include health care costs as a separate expense in your retirement plan and assume 6.0% annual growth rate to be conservative. You may want to assess your long-term care alternatives when you are healthy, or as early as age 50, when the most options are available to you.

6. Minimize taxes to maximize your retirement (Part 1)

Health Savings Account (HSAs) are a great way to minimize taxes

Health savings accounts are triple-tax free, so if you are eligible to contribute, make the most of it. Tax advantages include tax-free or tax-deductible contributions, tax-deferred earnings in the account and tax-free withdrawals for qualified health care expenses.

If you need to use your HSA for current health care expenses, your balances at retirement will be lower but you will still be able to benefit from the tax-advantaged status of the account.

Note there are tax penalties for withdrawals that are not qualified before the age of 59 ½; therefore, it is important to have a separate account for other expenses. See IRS publication 502 for details.

Maximizing an HSA for health care expenses

Evaluate a Roth at different life stages

6. Minimize taxes to maximize your retirement (Part 2)

4 ways to pay less in taxes and keep more for retirement

1. Optimize savings vehicles by opening tax-advantaged accounts (401(k)s, IRAs, HSAs) and consider diversifying across pre-tax/deductible and Roth options if available to you. As a general rule, saving into a Roth when income is relatively low and shifting as your income rises may result in lower taxes overall.

2. Consider deferring income when you are in your peak earnings years until you are in a lower tax bracket in retirement. However, if you are already concentrated in tax-deferred accounts, contributing to a Roth may help you diversify your retirement tax picture.

3. Work with your accountant and financial professional to actively manage your tax picture throughout retirement. Higher incomes can also affect your Medicare premiums and taxability of Social Security benefits. Consider proactive Roth conversions in years when your tax rate is low.

4. Maximize your after-tax return by holding your highest-taxed investments (those generating ordinary income or short-term gains) in tax-advantaged accounts, after funding your emergency reserves. Look to offset gains with losses when rebalancing your portfolio or taking withdrawals from taxable accounts.

7. Don't spend too much or invest too conservatively

Be flexible with your retirement income

How you invest and how much you can consistently spend in retirement are interdependent. Investing too conservatively puts a portfolio at risk of running out of money at a 4% initial withdrawal rate. Withdrawing 5% or 6% may not be sustainable even with more aggressive portfolios, especially if markets fall during early retirement years.

Instead of holding a static mix of investments or withdrawing a set amount each year, you may want to consider a more flexible approach that allows you and your financial professional to adjust as circumstances change. This can better reflect how your spending will shift as you age, factoring in the likelihood that you will tend to spend less during down markets and more when your investments recover and enable you to adjust your portfolio as markets and your time horizon evolve.

Effects of withdrawal rates and portfolio allocations

Help clients take control of retirement