The Secret to Retirement Confidence Isn't Net Worth

For years, retirees were told that saving $1 million was the benchmark for a comfortable retirement. Today, that number feels increasingly outdated, and recent studies bear that out. Americans now believe they will need nearly $1.5 million to retire comfortably.

Rising costs, longer life expectancies and market uncertainty have left many retirees wondering whether they'll outlive the money they spent decades building.

That fear is only becoming more common. Whether you're a young saver just starting your career or on the brink of retirement, the worry is less about if you can retire and more about if you've saved enough to maintain your current lifestyle.

The real retirement problem isn't always saving — it's spending

One of the biggest retirement planning mistakes people make is that they assume that their spending habits will remain the same or decrease in retirement; in reality, they might increase. Their lifestyle no longer matches what their savings can support.

High earners typically struggle with this more than most. They were used to increased spending during their working years, but once the paycheck stops in retirement, they're met with a rude awakening.

I've seen many retirees struggle with this problem throughout my career. Rarely is the issue about whether they saved enough, but whether they can live on the income their savings generate. That's why I believe it's important to find ways to replace the paycheck you've lost.

Replacing your paycheck

If you're no longer receiving monthly income from an employer, how do you replace it?

For many, Social Security alone won't be enough to cover essential living expenses. The answer lies in building a retirement plan around guaranteed income first and investment growth second.

Utilizing guaranteed income sources, such as annuities, allows the rest of your portfolio to remain invested in the stock market for growth and added flexibility.

This approach can reduce the emotional stress that often comes with relying entirely on the stock market for retirement income. All it takes is one bad year in the markets to potentially threaten the longevity of your money.

Creating multiple sources of income

Annuities are designed to address those fears directly. Think of an annuity like a self-funded pension. Instead of a company paying into a retirement savings vehicle, you're the one funding the investment. You contribute funds to the annuity, and in exchange, an insurance company promises to pay you a certain amount of money for a set period, depending on the type of annuity you purchase.

This predictable income stream can help cover basic living expenses such as housing, healthcare and utilities, replacing the paycheck you lost once you stopped working.

Annuities tend to be a safer investment because the value never goes down due to market conditions. It reduces the need to sell investments during downturns or worry about whether one bad year in the market will hurt your monthly cash flow.

The other portion of your money should stay invested in equities and other growth assets for discretionary spending and long-term opportunity.

Don't miss your window; plan early

Like many things in life, timing matters. I recommend people start building their retirement income plan about three to five years before retirement. That window gives you time to structure income strategies, evaluate expenses and prepare assets for the transition from accumulation to distribution.

Planning early gives you more flexibility and a better sense of whether you're on track to retire when you want. Instead of wondering whether you can afford to retire, you can start envisioning how you want to spend your time and what you want to do in your golden years.

Interest rates and opportunity

The current interest rate environment has also created a unique opportunity for retirement income planning.

While consumers often associate higher interest rates with expensive mortgages and credit cards, higher rates can also improve payouts on certain guaranteed income products such as annuities.

When interest rates were hovering near historic lows a few years ago, retirement income payouts were far less attractive. Today, higher rates have significantly changed the math for some retirees looking to create predictable income streams.

The bottom line: Retirement confidence comes from income security

Retirement planning isn't about hitting a magic savings number. It's building a strategy that aligns with the life you want to live.

1. Start planning three to five years before retirement. Create an income strategy before leaving work.

2. Build your retirement around income, not just portfolio size. Focus on replacing your paycheck to ensure essential expenses are covered.

3. Understand if your retirement can support your current lifestyle. If they don't match, make the appropriate adjustments to ensure your savings last.

The retirees who most often struggle are those who focus only on growing their money, without a plan to turn that money into predictable income, should market volatility strike.

On the other hand, the retirees who feel most confident know exactly where next month's paycheck is coming from, even if they no longer work for one.

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• Social Security, Healthcare and Tax: The Potential Complications of Working Past Retirement Age
• We've All Heard the Buzz About Roth Conversions, But Not Everyone Will Like the Reality
• What Is the Magic Number to Retire Comfortably?

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.