How long do you expect to live? When I ask people this, they invariably tell me how old their parents or grandparents were when they died… Wrong answer! Because of the mapping of the human genome and other medical advances, life expectancy today is far longer than most imagine. It is estimated that the first person to live to age 150 has already been born! While that may not be you, have you considered how long your assets need to last if you live to age 100 – or 110 – or 120? Unlikely? Do you want to take the chance of running out of income in your retirement?
While most people know what they want to do once they retire, they are not often clear on how to implement a retirement planning to achieve their desired outcome or where to begin. After more than thirty-seven years in the financial services industry, I find most individual’s mistakes regarding retirement planning fall into four categories:
They have no actual retirement planning in place
Their existing plan lacks specificity
They are not saving a high enough percentage of their pre-retirement income
Their rate of return is inadequate to meet their retirement goals
Do You Have A Retirement Plan?
If you do not have a formal retirement plan, then all you have are vague notions about your retirement. (I am speaking of an overall plan – not just retirement vehicles such as IRAs, 401(k)s, pensions, etc.) Would you set out on a vacation without an itinerary or specificity? Think of your retirement plan as a roadmap to your future. Having a plan will increase your confidence, help you to clarify and prioritize uncertain goals and then motivate you to take action to make those goals a reality. The three aspects of a well drafted retirement plan are:
- Where you are now? (As painful or discouraging as it might initially be, you need to know this!)
- Where you want to end up? (Steve Covey tells us to always “begin with the end in mind”.)
- How will you bridge the gap? (“A journey of a 1,000 miles begins with a single step!”)
It often helps to set intermediate goals along the way so that you can focus on something attainable in the short-term. And, having short-term goals can help generate momentum, urgency and more motivation than a goal that is twenty to thirty years down the road.
Is Your Retirement Plan Lacking Specificity?
Even clients who have a retirement plan on paper often do not have specific dates and financial data. Some questions that require specific answers are:
- How long do you (and your partner) expect to live? As noted above, the first person who will reach age 150 has probably already been born. And, if the task of determining your own life expectancy is too daunting, there are actuarial tables that provide national averages!
- At what age(s) do you intend to retire?
- What are your anticipated expenses, including health care costs? This does not need to be to the penny!
- What amount of income will you need to live a comfortable retirement?
- How much in savings and other assets do you have now, and how much will you need to acquire?
- What are the expected rates of return on your investments? Different asset classes will likely generate different rates of return.
- How will inflation impact your plan? (We generally assume a 2.5% inflation factor as a starting point.)
- What amount of Social Security and pension benefits can you expect to receive? (We use a comprehensive tool to run personalized scenarios that help you decide when to begin taking your unique Social Security benefits, and how much income you will receive.)
Do You Have an Adequate Savings Rate?
To accomplish your retirement goals, you must generally make choices decidedly anti-cultural … live well below your means, pay down debt, invest for retirement, and build your net worth. The historic advice is to save 10% of your income – which most don’t. For those who do, savings are often set aside briefly and then tapped into for expenditures.
For retirement, 10% is often not enough. A better target savings percentage, especially for those who are making over $100,000, may be 20% or even greater! Bottom-line … The nearer you are to retirement, the greater the urgency to save, and the more you will need to set aside from your current income. A good plan will tell you how much you need to be putting away given your age and current financial situation.
Debt is a factor in preventing many clients from achieving an adequate savings rate for retirement. If you are spending a large portion of your income to pay off business debt, student loans, car loans, credit card debt, and a home mortgage, then you are paying too much interest and causing a major drag on your ability to save enough money for retirement.
Even if you have manageable debt or are debt-free, a consumptive lifestyle can derail your ability to save for retirement.
You may feel the need to “keep up with the Joneses”, live in a luxurious home, have vacation homes and timeshares, drive upscale vehicles, send your children to expensive schools and spend lavishly on clothing, jewelry, dining, vacations, etc. But the money you spend now often sabotages your ability to live well in retirement. Is it worth the trade-off? Having a plan will help you prioritize and decide – both for today and for tomorrow!
Is Your Rate of Return Sufficient to Meet Your Goals?
Finally, you need to ensure that you are getting an adequate return on the money that you have saved for retirement. Are your investments:
- Keeping ahead of inflation?
- Adequately diversified to protect you against changes in various market corrections?
- Tax efficient?
- Sufficiently liquid (or a portion) in the event of an emergency or opportunity?
- In keeping with your risk tolerances … and time horizon?
And one more key item to consider…
It is not all about the money! In a 2013 Merrill Lynch study retirees were asked what they missed most about working. The #1 response at 34% was social connections. Please consider building a social network independent of your occupation before you retire. Join a club, take up a hobby, volunteer with a non-profit organization… make connections that will last into your retirement years. We often speak of financial diversification, but social diversification can have its rewards as well.
Benjamin Franklin summed it up nicely… “By failing to prepare, you are preparing to fail”. If you are one of the three-quarters of Americans who, according to a recent Harris Poll, are worried about having enough money to retire, let’s get started to secure the retirement of your dreams.
Written by R. J. Kelly – April 2015