Retirement Planning – Get A Free Retirement Report
Retirement…it is the big life event that we all plan for. Whether you are 30 years old or 60 years young, retirement is always approaching. However, the planning that needs to be done when you are 30 compared to 60 is extremely different, yet many fail to make the proper adjustments.
When it comes to the actual preparation, you may not have this vision yet if you are far away from retirement, but, one of the most important decisions that you can make is how you actually want to live in retirement. Where do you want to live? What size house will you be living in? What type of income will you be living on? Everyone’s vision of retirement is different, but what matters most is that you have a plan in place. Rarely will things work out perfectly or your retirement materialize just as you have forseen. However, when you have a plan in place that you can implement in retirement, then you will have the ability to turn your dreams into reality.
Retirement planning is so important, which is why you should absolutely consult with a professional financial advisor so that you can get an evaluation of your current financial situation to determine if you are prepared for retirement or not. Fill out the form to the right to receive your FREE Retirement Report, as well as a FREE, NO OBLIGATION consultation with a top advisor in your local area.
Identifying Your Retirement Income Needs
As mentioned above, everyone’s income needs in retirement are different. We all have our own dreams and visions of what we want in our Golden Years. If you are a bit unsure about what to expect in regards to necessary income while in retirement, there is a rule of thumb that you can use as a baseline to get an idea of what you may need to shoot for as a yearly income requirement when you retire. The rule of thumb is that you will need approximately 80% of your pre-retirement income to live a similar lifestyle in retirement. Using this guideline, if you are making $100,000 per year before retirement, then you should plan on needing a yearly income of $80,000 while in retirement. One of the reasons that you made need less income while in retirement is that certain expenses are typically eliminated by the time you reach retirement age. One big expense is your mortgage. Often times, unless you bought a house recently or needed to take out any home equity loans, your mortgage will be paid off and your monthly outlay will be reduced accordingly.
Of course, you need to determine whether this 80% figure is sufficient for your retirement goals. Whatever your particular dollar figure may be, the next question that needs to be answered is, “How will you attain your income goal.” A simple, but great way to visualize your income goals and how much work you need to do in regards to additional personal saving, is to put your income sources into 4 boxes.
Box 1: Social Security
Box 2: Pensions and other fixed income investments
Box 3: Variable Investments
Box 4: Your Responsibility
If we take the example above of needing $80,000 per year in retirement, lets take a look at how you can use these 4 boxes to get a clearer picture of how close (or far away you are) from hitting that $80,000 per year goal. $80,000 per year equates to $6666 per month (let’s say $6600 for cleaner numbers). Now, let’s just throw some example numbers into the boxes.
Box 1 – Social Security: Let’s say that, according to your Social Security statement, you will receive $2000 per month.
Box 2- Pension/Fixed Income: Let’s put in $1000 per month from an old pension account from one of your employers
Box 3- Variable Investments: You have $500,000 sitting in a retirement account. To simplify things, let’s just say we want to spread out this investment over the next 20 years. That equals $25,000 per year, or approximately $2000 per month.
If you add up the income from all 3 boxes, you will receive approximately $5000 per month from these income sources. Therefore, in box 4, you need to fill the gap with personal investments to reach the needed $6600 per month income (from our $80,000 per year assumption). There are a variety of ways to accomplish this goal, and it will be your financial advisor’s job to give you recommendations on the best strategies and financial vehicles to use. When you use this simple “box” outline to visualize what you have and what you need when it comes to retirement income, often times it can lessen the stress and make the retirement planning process less overwhelming.
The Miracle of Compound Interest
Quite simply, the earlier you start saving and planning for retirement, the easier it will be to achieve your income goals for retirement. In addition, when you begin saving today (instead of tomorrow), the amount that you will need to allocate towards your retirement fund on a monthly basis will be a lot less. This concept is typically where people fail and get overwhelmed by the prospect of having to save for retirement. If you wait until your 40s or 50s to begin this saving process, the monthly amount that you need to save to play “catch-up” may feel like a burden and seem unattainable. Let’s take a look at some numbers to illustrate this point.
This illustration shows the difference between investing $3,000 per year at age 30 and waiting 2 years and investing the same $3,000 per year until retirement at age 65 (assuming a 6% annual rate of return). As you can see, by just waiting 2 years, you would have cost yourself $42,275.
Regardless of your age, this illustration just shows that the longer you wait to start saving, the more long term pressure you are putting on your retirement nest egg. However, if you feel that you are behind with your savings, do not let that discourage you and prevent you from taking action today. All that matters is what you do from this moment forward. Your financial advisor will help you put together a plan that can maximize your retirement plan growth while maintaining the proper level of risk depending on the length of time until you hit your desired retirement age. In addition, advisors can often times help you budget your money more efficiently, such that your funds can be prioritized in a way where you can actually contribute more towards your savings while not having to actually take more out of your pocket.
Investing Based On Your Age
Regardless of the actual financial vehicle (ie, mutual funds, IRA, 401K, etc…) or the specific type (ie. blue chip stock, International stocks, municipal bonds) there are 2 main types of securities: Stocks and Bonds. Each carries with it a level of risk and reward, especially when you start digging into the thousands of varieties of these general forms of investments. If we take the accepted assumption that stocks carry more short term risk than bonds, there is a rule of thumb in the financial world that you should invest your age in bonds. For example, if you are 30 years old, you should diversify your investments into 70% stocks and 30% bonds. If you are 70 years old, then you should be in 70% bonds and 30% stocks. **Note** Please do not accept this as the way you should invest. This is a commonly held belief that does have merit, but it is up to you and your advisor to discuss this asset allocation in terms of YOUR specific goals and needs.
The premise behind the “invest your age in bonds” strategy is that you should be scaling back your risk exposure as you approach retirement. The last thing you want is for your nest egg to be exposed to the volatile market right before you need it. So, as you approach that target retirement date, the mix of bonds/fixed income securities will become greater. Again, the exact mix and asset allocation strategy is something your financial advisor will be able to speak more in depth about and formulate an exact plan based on your goals.
Your Retirement Planning Investment Options
It is important for you to know about your retirement planning investment options. In addition to the fixed income that you are planning on having in retirement (Social Security, pension), your retirement nest egg will primarily be funded by personal savings, which includes your employee-sponsored plans (401k and 403b), and personal IRA accounts. These are extremely important for your retirement savings because they offer tax benefits, and in the case of employee-sponsored plans, potential matching percentage options (ie. your employer matches your contributions up to X%). Whenever your employer benefits includes a 401k matching provision, you absolutely need to take advantage of that to its fullest. It is essentially free money.
Your advisor can help you navigate all of these options and recommend the most optimal mix of investment vehicles and contribution amounts. One thing to keep in mind…many of these retirement investment options have clauses in them that you cannot make an early withdraw (prior to age 59 ½) or else you will be subject to a hefty penalty. There are some exclusions where you can withdraw penalty free, but be sure to consult your advisor first before doing anything hasty.
It is just important you understand that the funds you a investing in your retirement savings vehicle are meant for retirement. So, if it can be avoided, do not make a rash decision and touch the money too soon. In addition to potential fees, you may also hamper your ability to build a proper nest egg to retire when you want.