One flaw with traditional retirement planning is the assumption that your expenses – the type and amount — will be the same (plus inflation) each year, from your final day at work to the end of your life, and that all you have to do is “replace a percentage of your pre-retirement income.” As people live longer, we have proof that isn’t true. Healthcare costs, especially, increase in our late retirement years, and if we don’t plan for them, we risk running out of money.
The solution is to consider retirement as a two-stage process. In the first stage, you do want to cover a reasonable percentage of the final salary you earned before retiring, although the percentage may need to be more than 100%. Your Social Security payments, any pension, interest/dividends and payments from income annuities ideally will cover that. If you need to withdraw principal, make sure it’s for a temporary period and from a secure source.
For the second stage, you will want to maintain those payments to meet your essential living expenses – and add another level of income to cover the gap for things like home healthcare and additional costs that occur as we age. More