If you are like most people, your adult life has consisted of making, spending, and saving money. However, only 40% of workers have actually tried to calculate how much money they need for retirement. Although a number of simplistic calculators are available online, we have found that each person’s situation is different, and therefore, establishing a “number” by yourself can be challenging at best and may prove unreliable. Retirement is a major step in one’s life and committing to a timeline requires a robust understanding of your specific circumstances. The risk of running out of money is too great to leave this decision to chance.
When should you begin planning for retirement? The sooner the better. Retirement saving should ideally start with your first real job. We strongly encourage clients in their 20’s and 30’s to begin to set aside money for the future. Ten percent of income is a good starting point; try to increase this over time to at least 15%. If you are lucky enough to have a retirement plan at work with a matching contribution -such as a 401(k) -make sure that you contribute at least enough to get the full match. Remember that the money that you contribute now has the longest time to grow. Your asset allocation should reflect the long-term nature of these investments. Part of retirement planning at this stage will include a review of retirement plan assets and risk tolerance and how these fit into your other financial goals.
Those in the middle part of their careers- ages 40-50- start thinking more seriously about the timing of retirement. Traditionally, Americans have considered 65 the standard retirement age; it coincided with the onset of Medicare and full Social Security benefits. However, in recent years, this has changed. The median retirement age in the US is currently 62 but many people would like to retire by age 55 thus extending their non-working years significantly. Importantly, the enrollment date for Medicare has remained at age 65 and full Social Security benefits have been pushed back to age 66- 67. In order to evaluate the success of an early retirement, one needs to factor in medical costs, the timing of Social Security, other income sources (such as pensions and investment income), taxes, and the extended longevity timeline. In short, a robust retirement plan is needed.
In the later years of working (ages 50-65), the finish line comes into view and people begin to have thoughts about the logistics of retirement. Assuming enough has been saved, how will the cash flow work exactly? Will the family be able to live on dividends and interest alone or will they be using the principle? What does the pre vs post-retirement budget look like? Should asset allocation change at retirement? These are all great questions and ones that can be readily answered with a retirement plan. Helping people get the answers that they need to define retirement is what we do. Retirement planning can be complicated, but with the right CERTIFIED FINANCIAL PLANNER™ the answers can be defined.
Finally, once retired, retirement assets need to be managed. Most people benefit from the help of an investment professional to build and maintain a diversified portfolio that meets their retirement needs for income and growth. The best investment managers consider the tax consequences, a client’s risk tolerance, estate planning issues, and short and long-term financial needs as discovered in the retirement plan. Life changes in retirement will likely alter the original plan: houses may be sold, grandchildren born, spouses die. The retirement plan is a living document that will evolve with the client and adapt to these changes. When used in conjunction with the proper investment management it is a very powerful tool.