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Will You Be Ready to Retire?
By John Kevin
May 2013, Volume 36, Issue 9
Depending on where you are in your career as a principal, retirement might seem like a world away. But you must prepare for the fact that retired principals, just like other retirees, face many financial risks once they stop working. You must ask yourself the question: Will I be ready to retire?
When considering financial retirement readiness, the goal is to enter your retirement years with enough to replace a defined percentage of your pre-retirement income. Most experts suggest a goal of replacing 80 percent to 100 percent of your pre-retirement income.
What Are the Risks?
Principals should also ask the question: Will I outlive my money? Enter longevity risk: the chance that you’ll outlive your financial resources. This risk may be mitigated somewhat by your pension and Social Security benefits, but if you run out of all other savings and sources of income, will your pension and Social Security benefits be enough to live on? Inflation risk is the risk that income in retirement won’t keep pace with overall inflation, thus your ability to sustain a certain standard of living diminishes over time. Your pension benefit may or may not have an inflation adjustment each year. Social Security benefits do adjust for inflation, but in the recent past (2010 and 2011), there were no increases. Unanticipated financial obligations such as healthcare costs or suddenly needing to support a parent or child can all profoundly impact even the best of financial plans.
Considering that you probably will have a pension payment and Social Security, it would not be unheard of for a retiring public school employee with full service credit to receive 60 percent to 70 percent pre-retirement income replacement from these two sources. As you consider how to best invest your supplemental savings plan, [403(b) and/or 457(b)] or any other assets you may have, it is important to consider your entire financial situation.
The key is to invest funds in a way that allows them to grow over time. A common refrain from school district employees is “I don’t want to lose money” when discussing their 403(b)/457(b) investments. This concern often leads to very conservative investments for the assets in these plans. The conservative nature of the portfolio can limit your ability to mitigate longevity and inflation risk in retirement, as well as not having additional financial resources when the unexpected happens.
Different asset classes (i.e. stocks, bonds, cash, money market accounts, etc.) offer varying potential for growth and at different risk levels, defined as the prospect of losing money. Stocks, for instance, typically offer the highest long-term growth potential, while they also tend to experience greater short-term price changes. Short-term investments, such as cash or money market accounts, typically offer lower returns but greater price stability. Of course, diversification cannot assure a profit or protect against loss in a declining market.
Working with your 403(b) retirement plan provider or a financial advisor can help with the prospect of building a diversified portfolio that considers your pension and Social Security benefits. These resources can help you determine your desired pre-retirement income replacement amount. Then factor in your expected pension and Social Security benefits. Once these estimates are calculated, you should have an idea of how much you’ll want to save in your 403(b) plan before retiring. Knowing the amount you’ll need, how long until you expect to retire, and what your risk comfort level is should provide the information you need to build a diversified portfolio that will improve your financial retirement readiness in the future. Of course it is always important to periodically review your progress and any changes in your personal and financial situation.
John Kevin is vice president of K–12 markets at VALIC, which represents The Variable Annuity Life Insurance Company and its subsidiaries, VALIC Financial Advisors, Inc. and VALIC Retirement Services Company.
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