You’ve made it to that magical time in your life – the home stretch to retirement. Whether you have made the decision to work another ten years, or even one year, there are ways to start preparing immediately so that you can help your retirement years be worry-free. You worked hard to get there, but the “work” doesn’t end the day you clean out your office.
That nest egg you created needs to be cared for and looked after, and this may be the most important job of your life. Sounds scary, right? It doesn’t have to be! It all starts with planning and being prepared for what’s ahead, before you walk out that door and start permanent unemployment. Some of these steps may seem obvious, but you will be surprised how many people ignore this process, either out of fear or laziness. The truth is, it will require a bit of elbow grease on your part, but these are some of the steps needed in order to start cementing that rock-solid foundation upon which your retirement will live.
We mentioned this a few weeks ago on this program, but defining your goals should be the first step in analyzing your retirement strategy. Most strategies center on cash flow, growth or some combination of the two. After you define what you want your portfolio to do for you and how that might change over time, it’s important to define the length of time over which you can make investments before needing access, which often relates to your life expectancy or those of your beneficiaries.
Most people start off their retirement plan when they are in their 30s. Usually at this stage, accumulation is the focus, and the age of retirement isn’t even a concern. You most likely have different financial goals, like buying a house and having children. You are saving for today’s events but also saving for retirement in a 401k plan. Your choices in the 401k have one common goal: grow and make money!
Now as you get older, your financial goal may shift, but what if your strategy hasn’t? Without a detailed understanding of your goals and a focus on achieving them, you may find you’re unable to maintain the lifestyle you desire or, at worst, possibly running out of money in retirement.
Keep in mind we are living longer today. Life expectancy was in the 60’s when social security was born, today life expectancy is in the 80’s.
Here are some very important questions to answer when considering what your goals are for retirement. You should also discuss them with your spouse so you have a clear picture of what is important to both of you.
When do you wish to retire?
Are you planning to stop working as soon as you hit retirement age or are you considering scaling to part-time work? Having an answer or general ideal to this is an important factor in planning your retirement
What do you wish to do in retirement?
Do you have plans to travel the world? Do you wish to stay in your home or would you like to scale back and move into something smaller? Maybe your dream is to start a new business. All of these questions are very important in consider when creating a retirement plan as they can affect your overall expenses.
I cannot stress this enough: Before you retire, you need to determine your monthly “burn rate.” Your “burn rate” is used to determine how much monthly income you’ll need during retirement. Use a Budget Planner and create a monthly and annual budget plan. Be honest about your lifestyle, keeping in mind that you will probably spend more in retirement because in retirement... EVERY day is a Saturday.
You will also need to add up all of your sources of income (such as Social Security, pensions, rental income, etc.) and figure out if there is a gap between your sources of income and your expenses.
You will also need to add up all of your sources of income (such as Social Security, pensions, rental income, etc.) and figure out if there is a gap between your sources of income and your expenses. If you need help doing this use our Income Gap Worksheet.
Take this time between now and retirement to pay off any remaining debts you have while you are still working. This includes mortgages, credit cards, car loans, personal & student loans. You will be in a much more comfortable position in retirement without these monthly payments restricting your budget.
If you plan to retire early, before 65, you will need to have a plan for health insurance as Medicare does not kick in until before then. Most retirees can keep their employer’s coverage for 18 months after leaving their jobs, otherwise you will need to pay for your own private insurance which can be very costly.
Saving for your retirement may also mean having a plan for others in your budget. Some retirees are being tapped for the long-term care needs of their parents. Talk to your parents about THEIR health care needs and options, and make sure you’re not surprised by unexpected bills in retirement.
A similar thing should be said for your children (or grandchildren) if they have special needs. In most states a child with special needs automatically qualifies for Medicaid, but make sure you have prepared a way to fund living expenses for that child after you and your spouse’s death.
Often times retirees contribute to their grandchildren’s college expenses. If that is an expense you’d like to help pay for, be sure to account for these costs in your planning ahead of time. A financial professional can help you evaluate the many ways to help pay for college and choose the one that’s right for you.
Now that you’ve done all this leg work, the next step is to bring all of this information to a retirement planning professional. Remember, your job is to be sure that nest egg is taken care of. It is a good idea to find a planner who is going to give you recommendations and financial advice with your best interest in mind. When planning for retirement, which can last 30 or 40 years, this can be one of the most important decisions you make. How great would it be to receive guaranteed income for life through proper strategy? Or to know all that the money you worked so hard to save is finally going to work hard for you?
You have been in the accumulation phase for your entire working life. While working, and still many years away from retirement, you may have taken on more risks with your retirement funds, fully knowing they would not be needed for a long time. Therefore, you could afford to ride out some of those down years. As you near retirement, you enter the Retirement Red Zone, and you may want to move toward a different allocation model, most likely into a more conservative portfolio.
In the Retirement Red Zone, you want to take on less risk. As you age and your investment time frame and goals change, your asset allocation should align with those changes, as well. This doesn’t mean you need to sell all your stocks because you are retired. Your portfolio may still need the opportunity to grow in order to keep pace with inflation during your retirement years. It is important to have annual reviews with your financial adviser to make sure you stay on track, and your retirement goals and financial portfolio stay aligned. This will help you achieve all that you envision retirement to be!
While there is no “best way” to plan for retirement, these six action items will help you as you head to a chapter of life that you’ve never been in before. The mistakes you can avoid now can make all the difference between the retirement you deserve, and the one you have to settle for.