Baltimore Ravens linebacker Ray Lewis retired last February after winning his second Super Bowl ring. After completing his 17-year career with the Ravens, some sources peg Lewis’ financial net worth at approximately $45 million. Ray Lewis, of course, is an exceptional retiree. For example, in 2007, according to the Federal Reserve, the median net worth for a retired person was $533,100 including home equity.
You might say that Ray’s wealth insulates him from ever having to worry about retirement pitfalls. But, as a financial advisor, I’ve seen that’s not always the case. In fact, Ray and the “average” newly minted retiree can face the same challenges. And most, if not all, of those obstacles can be faced with a strategy designed to meet your needs.
Whether I was advising Ray Lewis or the average retiree, I would suggest each one ask themselves these questions. First, what's the most important thing in the world to you? Perhaps, it’s helping your children or grandchildren build a business. Maybe it’s giving your know-how or resources to a foundation, alma mater or church. Second, what is the most important thing regarding the wealth you’ve accumulated? Some people want to preserve it for their needs, so they can remain independent. Others might want to buy a second home. Next, how do you plan to protect yourself from: a) health issues that you might suffer, b) running out of money, and c) losing income and wealth from (potentially avoidable) taxes?
Answering those questions can clarify goals. But what percentage of working income do Lewis and the average retiree need to maintain their respective lifestyles? According to an article last year in Moneymagazine, a replacement ratio of approximately 75 percent is recommended as a baseline.
I don’t give that number much credence, though. Here’s why: We often overlook the obvious fact that life is, well, unpredictable. Medical issues, health-insurance costs, modifications to one’s home or helping children financially can complicate our calculations. There are ways to mitigate these pitfalls to retirement planning. The key is to focus on formulating a strategy, NOT zero in on a particular type of investment product. Here are a few strategic questions:
- What is a sustainable distribution for your retirement?
- If your portfolio has lost value, where can you draw income without having to sell investments at a loss?
- If the market is rising, where can you move money so you don’t miss the benefit of further appreciation?
- How should you use the different types of income (i.e., fixed vs. discretionary) available?
If you ask and answer these questions before you retire, you’ll be well positioned to enjoy the retirement you’re working toward. Exercise caution, though. Even retirees with a retirement strategy in place can make mistakes. I'll outline some of the snares people fall into with my next post.
In the meantime if you have questions or comments, then contact me at [email protected].