Learn how you can begin to prepare for retirement by using a simple 3-7-5 strategy.
Preparing for retirement using a 3-7-5 strategy
Most of us are familiar with saving for our retirement. We have certain financial strategies to help us attain our long-term goals to live the lifestyle we want.
Once we move into the retirement phase, many of us mistakenly think that retirement is simply the reverse of accumulation and we pay ourselves a certain income from our savings until the money is gone. But how long will we live? How much savings is enough? It is important to realize that living in retirement takes a whole new way of thinking and a whole new set of strategies to avoid running out of money or not enjoying the lifestyle that we want.
If you haven’t already, it is easy to get started. You can begin to prepare for retirement using a simple 3-7-5 strategy. Here’s how it works. Start by recording three “buckets” of retirement expenses. These are financial needs, wants, and wishes we have. If you are uncertain what you will need in retirement, start by recording what you spend now to get a good estimate.
|Survival expenses or “needs”||Examples: Food, clothing, shelter|
|Desired expenses or “wants”||Examples: Travel, gifts, entertainment|
|Legacy or “wishes”||Funds remaining for your beneficiaries or charities|
Once you record what is included in your retirement expense “buckets,” you then record seven possible retirement income sources that will help to cover the expenses in the three expense buckets.
|Social Security||Guaranteed income in retirement|
|Employer-sponsored plans||Defined benefit plans or Defined contribution plans|
|Traditional IRAs||Contributions and rollovers|
|Roth IRAs||Tax-deferred or tax-free when qualified distributions occur|
|Nonqualified assets||Mutual funds, CDs, stocks, bonds, savings, life insurance|
|Continued employment||Phase into retirement gradually|
|Welfare or charity (including family members)||Last resort|
Once you record your survival expenses (needs) and your desired expenses (wants), you can align those with the sources of retirement income that you have identified. This will help you estimate any retirement income surpluses or gaps that may not be covered by your predicted retirement income sources. If there is an income gap, there are five options to help fill those gaps.
|Spend less and save more now, before your retirement|
|Take on more risk to increase potential interest or return on assets|
|Lower your expectations for your standard of living in retirement|
|Work longer before you retire or take a part-time job|
|Use a combination of all four above to allow for incremental adjustments|
As you can see, there are new ways of thinking with new strategies to help make your retirement savings last as long as you do. To start Re-Engineering Retirement® with a 3-7-5 strategy, call your tax advisor for information on how distributions from assets may be affected by tax laws. Also, call your local estate planning attorney to discuss how your legacy wishes can be transferred to your beneficiaries the way you intend them to be passed. And, call your financial professional to make sure your financial strategies are in alignment. To help you get started, download the Rethinking Retirement Workbook.
This page is designed to provide general information on the subjects covered. It is not, however, intended to provide specific legal or tax advice and cannot be used to avoid tax penalties or to promote, market, or recommend any tax plan or arrangement. Please note that Allianz Life Insurance Company of North America, its affiliated companies, and their representatives and employees do not give legal or tax advice. Encourage your clients to consult their tax advisor or attorney.
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