Recipe for Retirement: One Part Dreaming, Two Parts Planning
When each birthday rolls around, I'm still able to hoodwink the kids into believing I'm 35 (again!). I may still be a 30-something at heart, but there's no escaping the reality that time is marching on. And with each passing year, the gap narrows between my current working life and the fulfilling and financially independent retirement I'm planning for in the future.
Note that the key word here is "plan." I'm not just hoping for the retirement of my dreams ... I'm planning for it. Whether you really are 35 or further along on the curve of life, I can't emphasize enough how important it is to include retirement on your financial radar screen.
My second message to you is this: retirement planning isn't something you have to do alone. That's what I'm here for. The fact is, there are a lot of factors to consider and decisions to make, many of them complicated—and most likely you'll be revising those factors and decisions as life throws its various curve balls, good and bad.
The goal of this article is to lay out the basic nuts and bolts of retirement planning. But as you start to think about your own retirement and the steps to getting there, I invite you to give me a call. Let's talk about it—and together we can develop a plan that is designed to help ensure retirement is a future reality, not just a hopeful dream.
So, let's get started ...
The first question clients always ask during their initial retirement planning consultation is "When can I retire?"—to which I respond with three questions:
- How long are you planning on living?
- How much income will you need each year in retirement?
- Where is the money going to come from?
First question: How long are you planning on living?
This is an admittedly uncomfortable but necessary question everyone needs to consider. Lacking a crystal ball, we have to rely on national statistics to make an educated guess.
According to the CDC's National Center of Health Statistics, the average 65-year-old American retiree today will live another 18.6 years—and many will live beyond that. (By comparison, a century ago most people didn't even live to see age 65!)
Given how the statistics stack up, it's usually prudent to plan conservatively for a retirement that may span as much as 30 years.
Second question: How much money will you need each year in retirement?
The answer to this question largely depends on your personal retirement vision and goals, as well as other financial realities that may impact your financial needs in retirement. For example ...
- Lifestyle Changes: Do you plan to do a lot of traveling during retirement, develop hobbies, return to school, dine and go out to more, or pursue other activities that may impact your income needs?
- Housing: Where do you plan to live? Will you downsize or upgrade? Your choice of living locale and housing are a big factor in the amount of income you'll need to support your desired lifestyle.
- Health and Long Term Care: Will you be able to count on employer-sponsored or a spouse's health insurance in retirement—or will you be self-insuring until Medicare kicks in at age 65? What might you need to pay above and beyond Medicare to meet your healthcare needs? Are you covered in the event your health declines and you need living or nursing assistance?
- Family Responsibilities: Will you have family responsibilities with financial demands attached, such as helping adult children, supporting grandchildren, or caring for aging parents?
- Employment in Retirement: While it may sound paradoxical, it's not unusual for many retirees to take a part-time job or pursue other income generating activities during retirement. Do you envision yourself doing this?
Of course most people don't have the answers to all of these questions. And the farther out from retirement you are, the more difficult it may seem to come up with an answer. But the sooner you start thinking about these questions and getting a sense of what your retirement lifestyle will look like, the more accurately you can plan realistically for what you'll need.
Then, of course, there's always the question of inflation—the ever-present force that eats away at future purchasing power. The current and historical average annual inflation rate in the U.S. is about 3%, which means a dollar today will likely be worth $0.50 in about 23 years. A critical part of retirement planning is making sure you have enough cushion to compensate for the financial erosion caused by inflation.
Third question: Where is the money going to come from?
This is the point to start taking inventory of all of your potential income sources during retirement.
If you're among a shrinking number of lucky Americans, you may be looking forward to a traditional employer pension that will provide an ongoing paycheck in retirement. That's a wonderful income foundation that will help fund your retirement.
For many of us who won't be counting on a pension, the remaining income options look something like this:
- Social Security: Most Americans have been paying into Social Security for as long as they've held a job. The amount you'll get back in retirement is calculated based on the number of years you've worked and the average amount you earned during your 35 highest-earning years. But, if you are like the majority of Americans, Social Security alone will not be sufficient to cover all your income needs in retirement.
- Personal Savings: For most Americans, personal savings is the workhorse of retirement income.This includes all money you've invested in tax-advantaged retirement accounts like 401(k), 401(b), and 457(b) plans, as well as IRAs. You may also have other personal investments outside of such retirement savings vehicles. Building this personal savings nest egg requires some advance planning, including an investment strategy that is appropriate for your retirement timeframe, risk tolerance, and other unique factors.
- Home Equity: If you own your home, the equity you've accrued over time may be an additional source of funds during retirement should you decide to sell and downsize or move to a lower-cost area. Reverse mortgages that allow you to borrow against the value of your home are also an option, but should be evaluated carefully.
- Permanent Life Insurance: This type of life insurance combines a death benefit with a savings portion and does not expire (unlike term life insurance policies). The savings portion of the policy can build cash value over time that can be borrowed against, or in some cases withdrawn. Life insurance, and the type that you choose, is a larger topic that I would be happy to discuss with you.
- Employment in Retirement: As mentioned previously, you may choose to work part-time in retirement to stay busy, support your interests -- and, of course, bring in a little extra cash.
And one last (surprise) question: When will you be emotionally ready for retirement?
So far, we've only discussed the financial aspects of planning for retirement. But there's a whole emotional component to retirement, too.
If you are leaving a career that has largely defined your working life, you may find yourself disoriented in retirement. You may be leaving work relationships that are important to you. You may miss the affirmation and fulfillment that came with your job. Even if you don't really like your job, losing the structure that full-time employment provided may throw you for an unexpected loop. Finally, it may simply be psychologically difficult to stop getting a regular paycheck.
None of this is to say that you should continue to work forever—that's probably not realistic, either. But you should at least consider the emotional aspects of retirement and plan for them in the same way that you plan your financial readiness.
So, now what?
If you've spent some time thinking about the questions we discussed above, you're ready to start calculating retirement scenarios for yourself. Using this (highly) simplified retirement planning equation, you can get a ballpark sense of whether you will have enough money, given your current savings/investment habits, to support the lifestyle you desire in retirement for the number of years you expect to be in retirement.
There are many retirement planning calculators online—Raymond James retirement savings calculator—that can help you crunch the numbers.
But for the most comprehensive and personalized retirement strategy, I recommend doing a financial plan that takes into account your unique financial situation and lays out an achievable path to retirement. I can help you navigate the complexities of retirement savings, investment, and taxes—as well as how to plan for the uncertainties that can impact your plan.
Then, together, we can put your plan into action.
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