The day you retire from Fortune 500 can be a rewarding milestone for working hard your entire life. It can provide the opportunity for more relaxation and family vacations. 

For many current and future retirees from Fortune 500, retirement can also present many stressful questions that have been unanswered: Do you know how much your retirement will cost? Have you considered paying for your expenses? Do you know how to generate the retirement income you need? 

These are big questions — and those currently in retirement or approaching it should not ignore them. The sooner you begin planning your golden years, the less stress you’ll feel when you exit the workforce. The Retirement Group knows how important it is to understand and plan your retirement finances thoroughly. We compiled this guide to help current and future retirees know how retirement income works, and what they need to do to meet their financial goals. We will discuss five steps you can take now to better plan your financial future and live the life you want in retirement.

How do you envision your retirement? Will you spend more time visiting your grandchildren? Traveling? Golfing or gardening? Now it’s here — or closely approaching. It’s time to establish your financial goals for retirement. Every person is different, but at The Retirement Group we often see the following retirement goals:

Now that you know your goals, it’s important to calculate how much money you need in retirement to reach them. Below are the four main factors for Fortune 500 employees and retirees to consider when deducing the cost of your retirement.

1: Non-discretionary spending

• Living expenses: What you spend on groceries, housing, utility bills, gas, clothing, transportation, etc.
• Taxes: While you have some control over the amount you pay in taxes, it can still be one of the largest expenses retirees incur.
• Debt: The number of debt payments you make toward your mortgage, auto loan, credit card debt, medical debt, student loan debt, etc.
• Healthcare: How much do you pay each year for health insurance and doctor visits — and don’t forget to factor in possible medical emergencies

2: Discretionary spending

• Discretionary spending generally consists of wants and not necessary needs. It is things you could live without, but still want to put some of your money toward. Your amount of discretionary spending depends on your lifestyle and your retirement goals. If you’re looking to cut down on your expenses, this could be a good place to start. Discretionary spending may include:

• Hobbies: Do you have regular hobbies you’ve been doing for years, or perhaps some you’d like to focus on during retirement now that you have more time to do so? This could include golf, pottery classes, fishing, gardening, writing, etc.

• Travel: Traveling is a common goal for retirees now that they don’t have to sit at a desk for most of the day. This could include vacations as well as traveling to visit family. Travel is a big-ticket item, so it’s a good idea to begin planning ahead for trips as soon as possible.

• Family: A great aspect of retirement is the possibility of spending more time with loved ones, including children and grandchildren. Some retirees may also want to budget for their grandchild’s college fund, or perhaps for a big family vacation.

• Fun money: Retirement is a time to relax, and to some retirees that means spending their hard-earned money on fine wines, fancy dinners, or even a new sports car. Your budget will determine what activities or items fall into this category.

3: Inflation rates

From our experience working with Fortune 500 employees and retirees, inflation is often overlooked, but the fact is that inflation is a force that decreases purchasing power and the value of your savings. The United States’ annual inflation rate varies each year, but since 1925, inflation has averaged 3% per year.* A 3% inflation rate can mean the costs of living can double within 24 years. According to Allianz, over half (57%) of Americans are worried inflation will make basic retirement expenses unaffordable.[7]

4: Time horizon

No one knows how many years they have left, but it’s important to begin budgeting for all possibilities — after all, you don’t want to run out of money and be forced to return to work. With life expectancy — and the power of modern medicine — always on the rise, you may live a lot longer than you thought you would. For Fortune 500 employees, it’s best to prepare for a long life and one fully funded by your retirement income.

You’ve got a good idea of your goals and the total cost of retirement, so now is the time to decide how you will pay for them. The first step is to estimate the amount of income you generate without relying on your investment portfolio. Below are common examples of non-investment income sources:

• Your salary: If you’re planning on working during retirement, determine just how much you’ll make each year.
• Your pension: How much will your pension pay out regularly, and will that amount go up or down over the years? Remember that Fortune 500's accounts like 401(k)s and IRAs do not count as pension plans.
• Social Security income: Find out how much you will receive each month in Social Security, as well as the age you will begin receiving these payments. The financial advisors at The Retirement Group can help you determine the best strategy to maximize your benefits.
• Real estate and business interests: Consider how much you will regularly receive through business or property investments — and remember that these types of income often depend on market fluctuations.

Step 3: The fundamental question is: How are you going to fund your retirement? (Cont’d)

Investment income is another common way to pay for retirement. If your expenses are more than your income, your investment portfolio can help you make ends meet with more cash flow. To help you understand more about retirement investing, familiarize yourself with these important principles:

Cash flow vs. income

This is an important aspect of retirement investment, but from our experience with Fortune 500 employees and retirees, it is often overlooked. Your income is the money you receive, while your cash flow is the money you withdraw. You should have a solid source of income during retirement, and that may include taxable income like dividends and bond coupon payments. You can also generate cash flow by selling securities, where the amount you deposit compared to what you withdraw is a capital gain or loss. Overall, cash flow that comes from your portfolio can be a smart strategy for your retirement income. It’s important to focus on your portfolio’s total return as well as after-tax cash flow, and not solely on dividends. To maintain a strong focus on your portfolio, it’s important to decide how your assets are allocated.

Asset allocation

Asset allocation, or the things you invest in, is the best way to determine your portfolio return. As such, asset allocation is incredibly important in creating the retirement lifestyle you’ve dreamed of. Asset allocation has the potential to increase investment results and lower overall portfolio volatility. The three major categories consist of stocks, bonds, or cash. Some retirees view bonds as safer investments than stocks — but that is not always the case. Bonds generally have less volatility than stocks, which is why most believe stocks are riskier. Bonds could be a good idea if you have five or so years to invest, but that is not often the case for most retirees. The potential returns you’re giving up by not having stocks to help grow your portfolio increases the risk of running out of money. 

If you have more time until retirement, stocks are important, as they have lower volatility than bonds over a long period of time. When looking at your portfolio’s asset allocation, it can be important to have stocks make up a larger portion than bonds, depending on your situation. For example, if your portfolio is worth $1 million and you withdraw $50,000 annually, you could deplete your savings if you’re only invested in bonds because the returns will likely be too low. That’s not even accounting for inflation. Another risk is high withdrawals.

Excessive withdrawal

Withdrawing too much in the early days of retirement can have a negative effect on a retiree's finances in the later years. Even though equity markets may annualize 10% or so over the years, returns can vary greatly between years. It’s important not to miscalculate your withdrawals, especially during a down market, as this can deplete your principal.

When it comes to planning your Fortune 500 investments, significant decisions must be made. You will be relying on the income from these investments for the rest of your life. Investing means weighing your priorities to determine what you really want and if you have the financial means to turn those dreams into reality. For example, expenses that are personally important to you — such as funding your grandchild’s education — might have to take a backseat to invest in your financial future. Make sure you take the time to budget realistically to meet all of your financial goals.

You can meet these goals with the following types of investments:

Bonds

Bonds can be issued by countries, municipalities, or companies seeking to borrow money from investors. They are essentially loans — where you, the investor, lend money to a company or a government for a set period of time, in exchange for regular interest payments. Bonds may seem like an ideal investment for Fortune 500 retirees because they are generally not as volatile as stocks and provide consistent income. However, you may receive a lower total return over time than with more aggressive investments like stocks. Three major risks to bonds are default risk, interest rate risk, and inflation. Default risk is the risk that the company issuing the bonds fails to make full and timely payments of principal and interest. The highest-rated bonds have the lowest historical default rates. Junk bonds, or high-yield bonds, are riskier and have a greater chance of default.

When interest rates rise, the bond value goes down. This is interest rate risk. Over time, bondholders have the potential to make more money when interest rates are high, but the value of their bonds could decrease in the meantime. Another risk is that when inflation rises, your purchasing power decreases. Because most bond coupons are fixed, the payments you receive now won’t generate as much purchasing power later. Stocks are generally a better method of keeping up with inflation.

Stock Dividends

High-dividend stocks can seem appealing to most investors — after all, who wouldn’t want to get paid just for holding a stock? However, it’s important to put thought into your portfolio’s stocks. Every stock type has merits and goes through cycles. Choosing an investment based solely on dividends is not a good long-term strategy. There are many other factors you need to consider. It’s crucial to understand exactly what you’re getting into with each stock investment. Dividend payments are distributions of company profits back to shareholders. If profits go down, then dividends are likely to go down as well. Investors should care about total return, so if you force yourself to invest in dividend payers regardless of market conditions, it will probably cost you money. Overall, it is best to diversify your portfolio. Stock dividends can be beneficial, but they should not be your main focus.

Homegrown dividends

Homegrown dividends, or selling certain stocks for cash flow, is a great way to diversify your portfolio. It is fairly flexible, giving you an easy way to free up cash in a potentially tax-efficient way. This is because tax treatment for long-term capital gains is more favorable than income and short-term capital gains. Selling stocks also allows you to offset capital gains, which cannot be achieved with just dividends. However, it’s important to remember that you must sell stocks carefully — and by doing so, you may get the best return on your portfolio. Homegrown dividends have proven to be a valuable tool for many of our Fortune 500 clients.

Annuities

Annuities are long-term contracts from an insurance company in which you make a series of payments, and in return receive regular disbursements. Annuities also provide great returns over time. Does this sound too good to be true? The answer is yes. There are many downsides to annuities, such as a lack of liquidity, high fees, lack of transparency, and capped investment returns not transparently disclosed by companies. Most annuities are also very complex — so complex that many insurance agents selling them don’t fully understand them. In some circumstances, an annuity could make sense for your financial situation, but it is wise to proceed with caution.

You now understand the basics of how you will fund your retirement, but your work has just begun. Your retirement finances are incredibly important for your future and the future of your family, so you want to ensure you are adequately prepared. The last step of planning your retirement income is to work with an investment company that prepares you for your retirement years. 

The financial advisors at The Retirement Group understand the importance of planning for your retirement, and they can help you make smart investments while leaving no stone unturned. Look to The Retirement Group for assistance with the following:

• Retirement income planning
  
• Financial planning
  
• Investment management
  
• Social Security analysis
  
• Counseling and advice

The Retirement Group is a nation-wide group of financial advisors who work together as a team.

We focus entirely on retirement planning and the design of retirement portfolios for transitioning corporate employees. Each representative of the group has been hand selected by The Retirement Group in select cities of the United States. Each advisor was selected based on their pension expertise, experience in financial planning, and portfolio construction knowledge.

TRG takes a teamwork approach in providing the best possible solutions for our clients’ concerns. The Team has a conservative investment philosophy and diversifies client portfolios with laddered bonds, CDs, mutual funds, ETFs, Annuities, Stocks and other investments to help achieve their goals. The team addresses Retirement, Pension, Tax, Asset Allocation, Estate, and Elder Care issues. This document utilizes various research tools and techniques. A variety of assumptions and judgmental elements are inevitably inherent in any attempt to estimate future results and, consequently, such results should be viewed as tentative estimations. Changes in the law, investment climate, interest rates, and personal circumstances will have profound effects on both the accuracy of our estimations and the suitability of our recommendations. The need for ongoing sensitivity to change and for constant re-examination and alteration of the plan is thus apparent.

Therefore, we encourage you to have your plan updated a few months before your potential retirement date as well as an annual review. It should be emphasized that neither The Retirement Group, LLC nor any of its employees can engage in the practice of law or accounting and that nothing in this document should be taken as an effort to do so. We look forward to working with tax and/or legal professionals you may select to discuss the relevant ramifications of our recommendations.

Throughout your retirement years we will continue to update you on issues affecting your retirement through our complimentary and proprietary newsletters, workshops and regular updates. You may always reach us at (800) 900-5867.

1. What to do with an Early Retirement Ebook

2. Social Security Ebook

3. Lump Sum vs. Annuity Ebook

4. 401(k) Rollover Strategies Ebook

5. Closing the Retirement Gap Ebook

6. Coxwell, Kathleen. "What Happens if I Really Do Run Out of Money in Retirement." New Retirement, April 4, 2021

7. Miller, Stephan. "Inflation Could Bite Into Retirement Savings." SHRM, June 30, 2021