6 Big Questions to Consider for Your Retirement
It’s the big daddy of all questions I hear as a financial planner.
Am I going to be ok?
People simply want to know if they are prepared for what lies ahead. Do they have enough for the fishing trips they have dreamed of? Will they have to change their lifestyle when they retire? Will their children have to help out? There is a great deal of apprehension, and frankly, fears when it comes to this conversation because when you think about the future, it can feel like the great unknown; something we have no control over. But we can have an impact on our future if we take the time to look at where we are, where we want to go, and making a plan to get there. Planning for retirement is essential, and the good news is that taking steps along the way to ensure you’re on the right track can lead to your ultimate success. Let’s take a look at some of the key questions regarding retirement planning and what can be done to act proactively and address them.
When Should I Start Saving for Retirement?
Ideally? As soon as possible. The best case scenario would be to begin in your 20’s when your career has just started, and paychecks start coming in. What is the benefit of starting so early? The answer is the ever-so magic compound interest. Of course, it’s not technically magic, per se, but it comes pretty close in the financial arena. It’s the concept that you gain interest on the interest on your investments. Starting just 5-10 years earlier can make an enormous difference. It can feel like a huge hurdle to try and save money in your 20’s, but the effort to budget wisely and save can work even with a starting salary that seems impossible to chisel from, and it will pay off big time in the long run. Plus, if your employer has a 401(k) match offering, this would add to those extra years in the savings pot accumulating interest upon interest.
How Much do I need to Start Putting Away?
This may seem pretty obvious but…as much as you can. A rule of thumb that is often used to plan on aiming to save 70% of your annual pre-retirement salary to live a comfortable life. Everyone has different plans for what their retirement looks like, however, and that needs to be considered. If you have dreams of traveling the world, finally buying that beach house, or if you still have mortgage debt or healthcare bills to pay off, you may need closer to 100% of your pre-retirement income. The point is that it’s essential to look at what you’ll need for retirement with realistic eyes and make conservative predictions about what you will need. Things can change between now and your retirement, some adding and some subtracting from your expense calculator. You may have a child or children heading to college and putting some money aside now may deduct from today’s take-home, but that expense can be removed once that savings goal is complete. Taking a good look at what you and your advisor predict you will need to live the kind of retirement you wish is a key component in creating your financial plan since these numbers affect many other vital aspects of your retirement plan.
Won’t Social Security Cover my Expenses?
Maybe. But most likely not. There are several tools available to see what your projected Social Security benefits are likely to be at retirement age, but your number of years working and income can vary, and laws governing pay-outs can also change, so these numbers can vary from what your actual benefits will end up being. The Social Security Administrations website informs us that by 2034, taxes collected will only be able to pay just 79 cents of each dollar of scheduled benefits. Some may be tempted to start receiving their retirement benefits early, while they’re still working full time, but this is often not the best idea because the government will reduce your benefits based on a formula they use based on your earnings. That’s not to say it doesn’t make sense to claim benefits earlier than age 70 in some circumstances. If you plan on claiming spousal benefits, for example, the taper up in benefits isn’t the same as typical Social Security benefits, so the timeline of when you take these benefits isn’t part of the equation. Make sure to talk with your advisor about your specific situation regarding your social security plans to ensure that you won’t leave money on the table. If there seems to be a gap in projections as to how much you will need to live on and how much you will be receiving from Social Security and pensions, a retirement saving and investing plan created with your advisor is key.
Where Should I be Saving my Money?
A good option for many is a tax-favorable account such as an Individual Retirement Account (IRA)and a 401 (k) account. These accounts have different characteristics to assess while making your decision, but most permit you to defer taxes on the funds that you save as well as on the returns you build on that money. Essentially, your money gets to side-step usual income taxes until you start withdrawing your money years later. This will result in a larger amount of your money earning returns over time. This is an enormous benefit over other taxable accounts. Additionally, if your employer has a matching program for your 401 (k), that’s yet another boon to your bottom line with this type of account.
How Should I be Investing What I Save?
To accumulate the kind of funds that you’ll need to cover yourself through your retirement, stocks can likely provide the kind of growth that you’ll require. According to data from Morningstar, Inc., the long-term average annualized compounded (realized) returns for U.S. large-cap stocks over the past 100 years has been around 10% before inflation adjustment and about 7% after being adjusted for inflation. Given the strong returns that stocks have historically, it can be of great benefit to a younger investor whose timeline for retirement is more than 20 years away to put a majority of their portfolio into stock and stock funds. Which specific stocks are the best fit for your portfolio is another discussion that would take some analysis with your advisor. While stocks have a good track record over the long haul, they can certainly give your nerves the hiccups. For example, during the turmoil that occurred during the mortgage and credit crisis in 2008, The Dow dropped 3,600 points from the September 19, 2008, intraday high of 11,483 to the October 10, 2008, intraday low of 7,882. During the fall of 2008, major financial markets lost over 30% of their value. If you are starting a little later in life with a shorter investment horizon or you just don’t feel as comfortable with this kind of possible volatility, you can consider allocating a larger percentage of your portfolio into fixed income options which pay a return on a fixed schedule.
What if I Have Some Catching Up to Do?
Make a solid attempt to put away as much of your income as you can. Take the time to look at your expenses to see where your money is going every day. You’d be surprised by how many unnecessary costs you can eliminate without even disrupting your quality of life. For example, club memberships you never use, subscriptions to magazines you don’t get around to reading, or expensive dinners that can be replaced with healthy, budget-friendly meals at home. Also, consider other ways to bring in extra income through a side job or business (or “side hustle” as its often termed). There are many options out there to bring in additional revenue, especially with so much business today conducted via the internet, which can be done without necessarily disrupting your full-time gig or overextending yourself.
Bottom line, take a deep breath. It can be overwhelming to think about what lies between you and the kind of retirement you hope for, but with careful thought and a solid financial plan, you can bring your dreams closer.
To learn more about what you can do to plan for a secure and successful retirement, feel free to schedule a no-obligation consultation at FamilyVest.