Everyone thinks retirement is a long way off, but it’s not. People in their 50s know “the years have run like rabbits”, to misquote a line of poetry from W. H. Auden. Get married, have children, buy a house and before you know it, it’s time to think seriously about your retirement lifestyle.
Retirement, of course, is a topic that has been on your mind since you first began your working life. The most important asset you have is time and its positive effect on accumulating wealth. There is never a better time than right now to assess your situation. As a financial professional, I can help you determine the retirement lifestyle you want to have, and also help you calculate your capacity to achieve it.
Step 1: Study Your Monthly and Annual Expenses
The first thing to do is to look closely at how you’re spending your money. If you’re not exactly sure, my advice is to keep a log for two months and jot down every expenditure, no matter how small. You may be surprised to see how much you spend every month on such things as coffee, lunch, cable services, etc. While these expenses may provide a pleasant quality of life, they may also be draining your ability to have a more enjoyable lifestyle in retirement.
Step 2: Consider Cutting Back and Saving the Difference
Since time is your ally, use it to your advantage by reducing some of your unnecessary expenses and depositing these saved funds in the investments that will fund your retirement. Remember the story of the “Unnecessary Refrigerator”: Mary wanted to buy a new refrigerator and it would only cost $1,000. The old refrigerator was just fine and still had a long, useful life. When Mary began to calculate the effect of this expense through the next 20 years she realized that the $1,000 she wanted to spend on the refrigerator would become $8,000 in 21 years at a 10% rate of growth. Her decision became clear: did she still want a new refrigerator, or would she rather have another $8,000 when she retired? It’s the same choice for you. The more money you can set aside now in a well-planned portfolio, the more likely you’ll feel secure when it’s time to retire.
It’s important to realize that most people struggle with cutting back on their lifestyle when they enter retirement. They are very used to the lifestyle patterns they established when they were working and are reluctant to shift into a new pattern of living. This can become a serious problem when income is reduced but the expenses remain at their “working life” level. Challenge yourself to seriously consider what you can cut now so you can enjoy many satisfying retirement years.
Step 3: Estimate Your Costs in Retirement
This is not as difficult as it sounds, but you may need a financial professional to show you how it’s done. The first thing to do is establish goals for your retirement years. Do you intend to live where you live now, or are you thinking about moving closer to your children and grandchildren, or to a warmer region? Does the idea of travel appeal to you; do you want to volunteer your time and talents; do you want to start a new business? Whatever it is you choose to do, a financial professional like me can help you convert these interests into dollar values. I’ll also be able to calculate such expenses as your monthly needs for food, medicine, entertainment, etc. In essence, we’ll build a budget for your future lifestyle.
Step 4: How Much Revenue Will You Receive?
We’ll also need to identify the sources of your income. Perhaps you are in an employer-sponsored retirement plan like a 401(k), or a pension plan. You may have an IRA, and your investment portfolio may be a source of income for you in later years. You may own property that provides rental income, or might decide to buy some when you are retired as a way of offsetting taxes, investing in appreciating property, and hiring a management firm to run this “business” for you. If you’re married, your spouse’s retirement accounts should be included in your revenue calculations. There is also Social Security, and you and your spouse’s retirement benefits can be calculated, giving you a good idea of the monthly income you can expect.
You or your spouse may decide to turn your hobby into a source of income, or you might be interested in working part-time. If you have expertise, you may want to offer your services as a paid consultant. If you’re able to bring in additional revenue, this will preserve the funds in your investments, allowing them more time to appreciate.
Step 5: How Do Your Projected Revenues and Expenses Match Up?
Now that you have a great idea about how much income you can expect when you’re in retirement, and you also know what your monthly and annual expenses are likely to be, are you in the black? If not, then it’s back to the drawing board to look more closely at the possibilities for increasing your revenue or decreasing your expenses.
Remember, your best ally is the use of time. Consulting with a professional financial advisor like myself can help you find ways to improve your future circumstances. Together, we’ll calculate your Required Rate of Return (RRR) which will give us an insight on how to structure your investment portfolio and other financial assets so you can annually achieve the return you need to live the lifestyle you want. There is no magic in any of this; a financial advisor can mathematically calculate the best array of investments to achieve your retirement goals while controlling risk.
Step 6: Control Taxes
Another tactic you should employ is minimizing your taxes during your retirement years. When building wealth, you must not only find ways to increase your revenue, but also find ways to preserve your capital. In a conversation with your financial professional, a discussion can determine whether it’s better to draw from taxable accounts when you’ve retired, or your tax-deferred accounts instead. Exploring how part-time work might result in taxable Social Security benefits is another important consideration. Assessing the effect of local and state taxes on your property or income is necessary. If you decide to downgrade the size of your home to purchase a smaller property, tax issues will arise that could be mitigated with thoughtful planning. As your financial advisor, I can work with you and your tax professional to ensure that as much of your wealth is preserved as possible.
Step 7: Pay Off Existing Debt
Now that you have a fairly accurate idea of what your income and expenses will look like during retirement, the next task is to study the debts you’ve incurred and make a plan to diminish and extinguish them.
By being debt-free, you’ll be more in control of your monthly expenses in retirement. A debt analysis may reveal the value of implementing this strategy. Under certain conditions, it may be more sensible to enter retirement with an on-going mortgage…yet it may not. Because you don’t know which choice is better for your unique circumstances, a debt assessment will satisfy this question and improve your planning process. Debt can serve a purpose, but it has to be a purpose that best benefits you.
Step 8: Ramp Up Your Savings
As you near retirement age, it’s likely that you are now drawing the largest salary of your career. By increasing your investments, you can add a burst of value to your future financial security. If you have an employer-sponsored retirement savings plan or Individual Retirement Accounts (IRAs), make sure you are taking advantage of the annual maximum allowable contributions. Remember that the ceiling is higher if you’re 50 years old or older; as catch-up contributions allow you to invest additional funds to your employer-sponsored plan and your IRA in 2016.
Step 9: How Does Your Home Contribute to Your Retirement?
As mentioned above, it may be advisable to sell your home and acquire more suitable lodging. If your home and property require a lot of physical work like mowing lawns, emptying the gutters, etc., or the house is too big and no longer suits your personal needs, it may be a good idea to find more suitable housing. You could save money on your annual property taxes, move to a location that’s more appropriate to your new lifestyle, doesn’t have stairs, or saves you the hassle of shoveling snow in the winter.
As your financial advisor, we could also look into the idea of a reverse mortgage which could secure your housing needs for the rest of your life while also providing additional monthly income to maintain your chosen lifestyle. You may have many choices available to you which are yet unknown…and which could resolve your financial concerns.
Step 10: Planning for Health Care
As you plan your transition into retirement, you will need to become familiar with Medicare, and with supplemental insurance to cover the expenses Medicare won’t. There are a variety of supplemental insurance policies available for different lifestyles and needs. If you’re entering retirement as a healthy individual, you might choose a supplemental policy that requires lower premiums than someone who has medical issues. I’d be happy to look into this with you, and together we can consider the impact of deductibles, copayments, and supplemental insurance. There’s also value in having having a long-term care insurance policy, or acquiring a life insurance policy to offset medical expenses, and for other purposes.
Preparing for retirement with enough time to carefully assess your choices and maximize your current potential for improving your retirement lifestyle in the years to come is critically important to your future financial well-being, security, and peace of mind. The greatest fear people have is outliving their resources and being at the mercy of the government or their loved ones. By being proactive now and building a realistic plan, you can enter your retirement years with the confidence that comes from prudent foresight and wise choices.