Retirement Roadmap
Retirement SMH
Getting to retirement is a long, eventful and exciting road, and it may progress like this for some people:
WIDOWHOOD
RETIREMENT
GRANDPARENTHOOD
REMARRIAGE
DIVORCE
EMPTY NESTING
CAREGIVER
CHILDREN
MARRIAGE
SINGLEHOOD
CAREER
The environment for retirees and those approaching retirement is changing significantly. Life expectancy is up 30 years since the last century. The U.S. 65-year-old population, currently 53 million, is expected to grow by 50% to 79 million in 2050[1], and the 85+-year-old’s is the fastest-growing demographic in the country. The average number of years we spend in retirement in the 1960s was about five, in 2010 it had grown to 30. All this has led to some retirement financial fears for people, such as - the rising cost of healthcare, the chance of outliving your money, will all my social security benefits be there? Along with this, will there be another market crisis, and how much will inflation eat into savings.
These are real retirement concerns people face for themselves and others.
Mapping the Road to Retirement
It makes sense to periodically review your financial strategy along the road to retirement to make sure you are taking advantage of all available tools and resources that can help build your retirement income. Your ability to save before retirement will provide you with a nest egg that will help reach your goal of a dignified and independent retirement. You may want to consider these five steps to stay on track toward reaching your retirement goals.
Remember, you will not need just one retirement plan, it will need to be updated and adapted to changes in your circumstances and environment.
“It is better to be roughly right than precisely wrong.” - John Maynard Keynes.
1. Determine your needs for retirement income.
It’s never too early or late to start saving for your future. With people living longer than ever before, your retirement income may need to last longer and longer after you stop working. Will your expected income in retirement be able to keep pace with inflation over this extended period of time? For example, with an average annualized rate of inflation of 3.5%, the cost of goods and services would increase each year and would double in about 20 years’ time, i.e. bag of groceries that cost $100 today, the same groceries will increase in cost each year to $200 in 20 years’ time. With this in mind, and especially if you are not fully funded in retirement (you have all you need for as long as you need it), you begin to realize that you will need to remain wisely invested in the riskier equity markets to stay ahead of inflation and provide a possibility for upside.
2. Plan beyond Social Security and Increase your personal savings.
With the uncertainty of Social Security and the decline of company-sponsored pension plans over the past several decades, the responsibility of saving for retirement income has shifted from employers to employees. Therefore, depending on your financial circumstances at the time of retirement, Social Security alone will most likely not be able to provide you with the income you’ll need in your retirement. Surprisingly, only 4% of retirees receive the maximum social security benefit by electing to receive their social security at age 70. Even minor adjustments to your household budget that re-allocate some cash to savings instead of consumption and make an important difference. I tell my clients, “When you save, you are sending money to your older self and they will thank you for it”.
3. Take full advantage of your company retirement plan and use of personal tax-advantaged alternatives.
If you are an employee consider and budget to contribute the maximum amount to your employer-sponsored retirement plan. This allows you to take full advantage of pre-tax contributions that accumulate a nest egg on a tax-deferred basis. In addition, many employers match employee contributions, which further increases the value of your account. If you are self-employed and living the gig-life you have other options to save on a tax-deferred basis, such as a Solo 401(k), IRAs and Roth IRA accounts, and Roth conversions in low-income years.
4. Put yourself in the driver’s seat
Retirement may or may not seem a long way off, however, the sooner you begin taking advantage of all your retirement savings opportunities the better prepared you will be for your retirement years. When a client is approaching retirement and will need to draw on retirement savings for their day-to-day living costs, I prepare a Household Balance Sheet (HHBS) for them. The HHBS summarizes, in today’s dollars (Present Value), all their assets, including the value of any retirement part-time work, passive income, and their social security benefits. I then compare their total assets to their total liabilities that include their living costs in retirement, in today’s dollars. The HHBS provides an excellent picture of the feasibility of their retirement goals and the options available to them, putting the client in the driver’s seat
5. Take a step
Remember it is wise to take some time to revisit your retirement strategy on a regular basis and understand what your current saving rate will provide you. Be sure to consult with a financial professional, who can evaluate the feasibility of your retirement plans and guide you in making important decisions about - your retirement goals and expectations, the timing of your retirement and social security benefits, the need to work in retirement, sources of passive income, investment strategy, minimizing taxes, flexible withdrawal rates, and your current savings level. All with the goal of keeping you on track to your financial goals for the future.
[1] Source US 2010 Census
