Some of you may remember the days when you took a job at a company, worked for 20-plus years, and retired with a pension and Social Security benefits. Your commitment to the company and years of hard work paid off with a generous pension that would take care of your retirement needs. Well, those days are over. Corporate pension plans (aka defined benefit plans) have been replaced with defined contribution plans such as 401(k) plans. This change is not necessarily a bad thing, but it does shift the responsibility from the employer to the employee when it comes to preparing for your retirement.
I realize that, to some, this can be complicated. The overload of information from the media, social networks and friends is enough to confuse even the most diligent investors. Keeping things in perspective and having a plan to accomplish your goals will give you the confidence to know your retirement will be spent the way you intended. Simple steps you take today will pay off for you in the future. (For more from this author, see: 4 Steps to Successful Retirement Savings.)
Picture Your Retirement
Retirement planning is not a one-size-fits-all proposition. For you to know what you will need in retirement, you need to picture your retirement. Do you want to retire in Florida? Or will you stay in your hometown? Do you want to travel or prefer to stay local? Take the time to identify all your wish list items with your spouse and figure out the ideal retirement for the both of you.
Plan For a Long Retirement
With the advancements in healthcare and healthier lifestyles, people are living longer. If you plan on retiring at age 65, you can expect to live an additional 20-30 years. Think about that! If you started your career at the age of 21, you spent 44 years working and will spend nearly as much time in retirement. If you don’t plan for a long retirement, you could come up short. (For related reading, see: Retirement in an Age of Longevity.)
Evaluate Your Expenses
During our working years, we come across unexpected expenses. Braces for the kids, broken car, new roof on the house, etc. As you approach and prepare for retirement, many of these unexpected expenses will no longer be an issue. But that doesn’t mean we shouldn’t plan on different expenses. It’s important to identify and understand how expenses will impact your retirement including healthcare costs, inflation, taxes, etc.
Identify Your Sources of Income
Once you retire, the paychecks will stop and you will need to rely on other income sources. Whether it’s part-time work, Social Security, a pension or your investment accounts, you will need to understand your options and when you want to begin tapping into each source. You may want to defer your Social Security or you may be able to take a lump-sum pension distribution. Each source of income has its pros and cons depending on your individual circumstances.
Prepare an Investment Strategy
With retirement planning, we basically have two stages, accumulation and distribution. These are very different and need to be managed accordingly. During the accumulation stage, which is while you’re working, you can generally be more aggressive in allocating your investments and growing your portfolio. However, once you decide to retire, your investment strategy must change. You may not be able to afford a massive market correction or you may have enough assets that you no longer need as much risk. Be prepared to make the necessary changes that will best suit your risk/return needs and expectations.
Address Your Fears
Circumstances in your life will change and you will be faced with challenges. However, a lot of these fears are simply a reaction to something unknown. Maybe you wake up one day and hear that inflation is skyrocketing. You worry that the purchasing power of your retirement is falling. If you are working with an advisor, he or she can help put that in perspective and more importantly show you how it will impact you directly. If you took the steps to plan your retirement honestly and realistically, many of these fears won’t have much of an impact.
According to the Employee Benefit Research Institute, 47% of American workers have saved less than $25,000 for retirement, and 24% have saved less than $1,000. I realize life’s demands get in the way, but with a little effort today, you can avoid being one of these statistics and enjoy the retirement you always wanted.
(For more from this author, see: Investing Basics: What You Need to Know.)