Please ensure Javascript is enabled for purposes of website accessibility

Is Your Retirement Plan Realistic?

By Maurie Backman - Oct 8, 2017 at 8:04AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Having a plan is the first piece of the puzzle. Vetting it is just as important.

Whether you're years away from retirement or are about to leave the workforce for good, it's critical to have a well-thought-out plan in place. Without one, you risk falling short of your financial goals and entering retirement without a clue as to how you'll spend your days.

But while creating a plan is a crucial first step on the road to a satisfying retirement, that plan will only serve you well if it's rooted in reality. Here are a few questions to ask yourself when evaluating your plan.

Couple speaking to another woman


1. Will you have the income to sustain the lifestyle you want?

Perhaps you've mapped out a retirement plan that incorporates a healthy mix of travel and time close to home. But unless you have the finances to support that plan, it won't do you very much good.

Before you get too comfortable with your plan, get a good sense of what your various expenses will cost, and make sure your savings actually stack up. For example, did you know that healthcare will cost the average healthy 65-year-old couple today $400,000 or more in retirement -- and that's not including long-term care? Also, are you accounting for the various housing costs you're likely to encounter as a senior? Even if your mortgage is fully paid off, you'll still need to cover insurance, property taxes, and maintenance, which can equal as much as 4% of your home's value.

You might look up your nest egg balance and see a respectable number there on the screen, but unless that figure is great enough to cover the expenses you're likely to face, you'll need to do better. That could mean postponing retirement for another year or two or adjusting your lifestyle plan to align with your savings level.

2. Are you aware of how much (or how little) Social Security will provide?

There's nothing wrong with factoring your Social Security benefits into your retirement budget. Quite the contrary -- you should estimate your benefits and get a sense of how much income Social Security will give you based on your earnings record. But don't wait too long to take this step, because many seniors are surprised to learn what limited buying power those payments give them.

The average Social Security recipient today, for example, gets $1,360 a month, or $16,320 per year. That's hardly enough to live on, nor can it constitute the bulk of your income if you want a reasonably comfortable retirement. When assessing your retirement plan, make sure it includes an accurate estimate of what you'll get from Social Security -- because the wrong assumption could throw the whole thing off.

3. Are you equipped to handle the cost of long-term care?

If your retirement plan doesn't include a contingency for long-term care, then you're making a big mistake. A good 70% of seniors wind up needing some type of long-term care, the cost of which could be astronomical without insurance. The average nursing home stay, for example, costs $225 per day, or over $82,000 per year, and that's with a roommate. Assisted living facilities, though less costly, are also no bargain: You'll likely pay over $43,500 a year to reside in one.

Signing up for long-term care insurance in your 50s or 60s can help defray the eventual costs you might face. Another option, if you don't want to pay those premiums, is to pad your nest egg so you have enough money to cover long-term care expenses on your own. The choice is yours -- as long as it's factored into your retirement plan.

4. Are you making reasonable assumptions about your investments' performance?

Countless financial professionals swear by the 4% rule, which states that if you begin by withdrawing 4% of your nest egg during your first year of retirement, and adjust subsequent withdrawals for inflation, your savings should last 30 years. But whether you plan to withdraw 3%, 4%, 5%, or another percentage of your savings each year, you'll need to make sure your investments perform well enough to support the rate you're counting on.

A bond-heavy portfolio, for example, won't do as good a job of keeping up with inflation as a portfolio loaded with stocks (at least not in today's interest rate environment). That's why you'll need to take a closer look at your plan and make sure your investment mix is healthy and allows for the yearly distributions you're aiming to take.

Though having a retirement plan to begin with is far better than having no plan at all, if you really want that plan to count for something, spend some time analyzing it to make sure it's realistic. You may need to make some changes to ensure that you don't run out of money later in life, and the sooner you do, the better you'll fare in retirement.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 07/07/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.