Ideally, retirement is the time in which you get to enjoy the fruits of a lifetime’s hard work. But it doesn’t happen magically on its own. It takes planning and action to get retirement right and be one of the successful retirement investment stories you dream of.
Here are 12 things to consider, whether retirement is decades away or just around the corner. (Because there are many aspects of a successful retirement, we’ve broke these questions down into 3 categories.)
Knowing When to Retire
1. Determine your net wealth.
Tally your assets minus your liabilities based on current market values. For example, your home has probably appreciated in the last decade, so what would it sell for now? Perhaps you have assets you want to liquidate, like a second home or a boat. If you are a business owner, you’ll want to know how much you are likely to get for the company’s sale. Severance and stock options might also be significant assets as you assess your net wealth.
2. Nail down your post-retirement lifestyle.
Before you know how much money you’ll need to retire, map out your future lifestyle. Where will you live, for example? Will you relocate? Will you downsize? Whether you stay where you are or head out to newer pastures, know the costs of living you are likely to face. Have you included expenses associated with health care, travel and a hobby or two? Entertaining and dining out can get expensive in a hurry, so be realistic in your planning. Your prediction might not be totally accurate, but it’s a good starting place.
Think about how your expenses will change in retirement. For instance, will your mortgage be paid off before you retire? Will travel take a bigger bite of your expense budget?
Next, figure your retirement income. You’ll no longer be saving for retirement after you retire, so that money can be used elsewhere to support your lifestyle. Include your Social Security benefits, retirement account withdrawals and any pension or other income.
3. Determine if you have enough saved.
Let’s say you plan to live on $50,000 a year for at least another 20 years. That means you need funds with a present value of at least $1 million, before inflation. Getting an accurate present value can be tricky, because it depends on the discount factor (or annual rate of return) you expect on your savings and investments. Simply plugging in a number like 8 percent might be OK for the long term but doesn’t account for annual fluctuations that can greatly impact your cash flow in any given year. Your goal is to accurately determine how far your savings will go.
4. Consider restructuring your assets.
The wrong mix of assets exposes you to the risk that you’ll outlive your money. Too aggressive and you can suffer heavy losses. Too conservative and you won’t get ahead of inflation. Stay in contact with your financial advisor and review your financial plan on a regular basis. This is especially important as you get closer to retirement. This is often the difference between retirement nightmares and successful retirement investment stories.
Structuring Your Retirement Plan
5. Understand your current finances.
It all starts with a budget. Don’t look at budget-keeping as a chore. Rather, it’s an opportunity to take control of your finances and impose your priorities on how you spend your money. Creating and tracking a budget gives you insights into your income needs and expenses at retirement. The closer retirement looms, the more important it is to master your finances through the very important exercise of budgeting.
6. Maximize your retirement plan contributions.
If you have a 401(k) or similar plan at work, fund it every year with at least as much money as required to take full advantage of employer contributions. Your employer might contribute a fixed amount, a fixed percentage, or matching funds up to a limit. In addition, if you can, you (and, if applicable, your spouse) should fund IRA accounts to the max. Consider whether to have a traditional or Roth IRA – many people have both! They each have their advantages.
7. Plan for your money to last throughout your retirement.
You want to arrange your finances so you don’t outlive your money. To do so, estimate your life expectancy given your and your family’s health history. These estimates help you determine your required nest-egg amount for retirement, which then drives your retirement plan forward.
8. Allocate your investment dollars carefully.
Are you maximizing your contributions to your tax-favored retirement accounts? Your retirement investments should reflect your age and life expectancy. Don’t be tempted to minimize investment risk as you age, because this could be counterproductive after inflation takes its toll. By keeping a reasonable amount invested in riskier assets, you may be able to help increase your return over the course of your post-retirement years. Talk with a financial advisor about your risk tolerance. Many investors have it wrong!
Spending Plan Tasks
9. Understand that retirement spending isn’t linear.
A survey from the Bureau of Labor Statistics shows that spending usually tapers as we age. Household spending for each of the three decades beginning at age 55 was found to be $65,000, $55,000 and $42,000, respectively. A second study using data from the University of Michigan shows spending increases toward the end of life as health costs mount. These facts make budgeting more complex, which is one reason to seek the advice of a professional.
10. Plan for your 70th year.
Two important events occur during your 70th year. It is in that year that you can no longer postpone taking Social Security Benefits or Required Minimum Distributions from your retirement accounts. If you are someone who has been able to wait until 70 to receive these cash inflows, your budget will need to reflect this change. However, many folks start taking these benefits before 70. Understand these trade-offs before deciding when to begin receiving distributions.
11. Understand your spending plan’s trade-offs.
To construct a realistic retirement spending plan, you must separate discretionary and non-discretionary expenses and compare them to your income from all sources. Does your plan adequately capture your actual spending patterns? How quickly will it draw down your savings? Your answers should help you decide if and where you should cut back your spending.
12. Evaluate your ‘fixed’ expenses.
Over time, you can reduce non-discretionary spending in several ways, including downsizing, relocating to a less costly area, dumping old life insurance policies you no longer need and ending expensive hobbies, like boating, that have become less important to you. These steps can reduce your spending and allow you to stretch your money further.
Many of these steps will likely apply to you directly. It’s a good idea to take up your retirement plans with a fee-only, fiduciary financial advisor. You only get one retirement, so plan properly and get it right! Make it one of the successful retirement investment stories other people talk about.