When I teach classes, my first order of business is to help future retirees know they MUST have a plan if they want to run in to a secure and comfortable retirement. In doing so, I try to make it perfectly clear that a 300-page manuscript IS NOT necessary. Just a roadmap to get you where you
want to go, from where you are now.
Clearly, when it comes to investing for retirement, valuable advice is: DON’T focus on the day-to-day market blips. Unfortunately, U.S. savers (per U.S. News & World Report) have taken that suggestion a bit too far.
“Instead of avoiding daily monitoring of plans, many Americans are ignoring their savings – or don’t even have a strategy. According to a recent survey from Voya Financial, 80 percent of those with retirement plans have avoided reviewing or making any changes over the past year. “That’s compared to 43 percent of the respondents making changes to a phone, cable, or Internet plan.”
In full disclosure, I did change my cable package this year. Strangely, it was my 21-year-old son, Josh, who was most startled that Sponge Bob was no longer available. He’s an airplane pilot who flies when he’s not watching Nickelodeon – so figure that one out!
So let’s begin with a very simple question. What should you include in your retirement plan? Basically, your plan should address where you are now and how you can get to where you want to be for retirement. Remember, your plan doesn’t need to be the length of a huge novel like War and Peace. Instead, it should just touch on the basics. Your journey towards crossing the Finish Line from career to retirement will go easier if your plan includes the following:
Save as much as possible! Don’t make the mistake of saving less because you think the growth of your investments will cover shortfalls. It won’t. How much should you save? That depends on how much you intend to spend in retirement; however, it should be noted that increases in your savings will go further than increases in your expected rate of return.
Spending During Retirement
Many people underestimate how much they will spend because they’d rather not contemplate not having enough cash in the bank to fund their ideal retirement.
Current and Future Tax Rates
Tax rates may currently be on sale, and the time may be right for Roth conversations for your savings to grow tax-free.
Rates of Return
It is best to be cautious. The choices are a) Use a high estimate for rate of return so the outcome looks good in the retirement calculator, or b) Be more realistic. If you’re more conservative, you may have more money in your later years. The alternative is sweating out every, last penny until your final breath – which seems like fun! Not.
While many throw a 2-3% rate of inflation into their battle plan, it may be more prudent to use a rate double that initial amount in retirement because of medical costs.
Investment Mix (Stocks vs. Bonds, etc.)
Excess risk isn’t always the bane of a retirement plan. Often, it’s taking too little risk. There are perils to being too conservative in retirement. Hint: Reducing your stock exposure after your retirement party may not be the best play!
Money in Taxable, Tax-deferred, and Tax-Free Accounts
Many people pay a (figurative) penalty for keeping too much money in taxable accounts. You can get hurt by holding too much money in accounts that generate very little return.
Pay attention to the order in which you spend your assets during retirement. A lesser-known fact that surprises many in retirement is that the order in which you spend your money (IRAs/Roth accounts/taxable accounts, etc.) may matter as much or more as the rate of return you generate on your retirement assets. Simply, if you take the money out in the wrong order, you’ll greatly reduce the longevity of what you have. The order of how you spend down your assets should not be overlooked.
In a nutshell, your plan should include every dollar you have, every dollar you anticipate earning from now until the end, and every dollar you anticipate spending in your lifetime both for living expenses and taxes. This is a start, but the process should not be static. All the inputs for your retirement should be reviewed each and every year. Things change, as you know. So your plan should do the same.
That’s just the way it works!