Retirement planning isn’t just saving and investing. Good planning involves actionable steps to visualize how things are actually going to work once you walk out of “corporate world” and into “retirement land”. Here are five items that must be specific within your retirement plan. With these identified and exercised, you will have some critical pieces in place to assist in determining a retirement date you can be comfortable with:
Step #1: Set Retirement Income Goals
We would all love to be mega-millionaires in our retirement, but that’s not reality. A practical, doable retirement plan starts with identifying what one really wants as a livable, enjoyable income in retirement. For some that might be $60,000 a year. For others, it might be $360,000 a year. Whatever the number, spend some time pegging the true cost of running your life in retirement and spelling out why it should be that number. This is arguably the most critical number to build your plan around. To put it another way, “what is the annual income you require to maintain your desired lifestyle for the remainder of your life?”
Step #2: Determine Where Your Income Will Come From
Some folks assume our current work efforts should be enough and whatever is taken out of our paychecks for our 401(k) plus company matching and Social Security will provide sufficient funds for retirement. For a very (very) few with a defined pension plan, that might still be the case. But for the rest of us, the exact income sources, and how much from each, will matter. In many situations, more than what has been socked away in qualified retirement accounts is needed. A well-crafted plan will include a mix of retirement income from not only 401(k)’s and Social Security, but taxable savings invested in brokerage accounts, self-funded IRA’s and Social Security benefits….and potentially still working some more, preferably because thats what we want to do and not what we have to do. And sequencing when to access amounts from each of those in retirement sources is important as well. The worst surprise reaching retirement would be realizing you don’t have enough and then having to go back to work.
Step #3: Determine the Necessary Savings
This is where time comes into play. Based on your target goal of income per year, saving early in your life adds more funds for later. So, 10 percent of income (the “Pay Yourself First” rule) is probably fine for someone in their 20s. But if you’re in your 40s, you have less time and may need to save more for the same target income. Start with automatic savings to an employer-sponsored plan and make sure you take full advantage of any company match (Free Money!). If your company offers a Roth 401(k), research or ask your advisor which is best (traditional or Roth) based on your circumstances. Based on steps 1 and 2 above, you can determine what your overall savings rate should be to reach your goals. Whatever that amount is, add it to the rest of your savings (possibly through a taxable account investing with a low-cost custodian such as Vanguard) to get to your overall percentage target each year. The combined amount will be your retirement savings. And watch those investment costs...
“The miracle of compounding returns is overwhelmed by the tyranny of compounding costs.”
— John C. Bogle, Founder of Vanguard Funds
Step #4: Plan on Living a Long Time
If you’re in reasonably good health (and even if you aren’t) there’s a good chance you’re going to live a long time. My 96-year-old mother recently attended the birthday party (well it wasn’t much of a party per se) for her friend turning 104. This is not that unusual anymore. And even if genetics don't look good for you, plan for a long life anyway since it's better to be prepared than having to “figure it out” in your 90’s!
Step #5: Consider Health Insurance Coverage
If you’ve planned well and have the opportunity to retire early, leaving the corporate world and entering retirement land can still come with challenges. The most common is health insurance coverage. Folks who retire before they are eligible for Medicare coverage at age 65 may be shocked to find their planned expenses are blown up as a result of higher than expected health related costs. It is not unheard of for annual private health care insurance premiums to be over $20,000 for a couple with individual deductibles of over $7,500 (and that’s all in after-tax dollars as there is no government pre-tax health care subsidy in retirement world like there is in corporate world). If you can’t afford good health insurance in early retirement, don’t retire early, period. The easiest health insurance to have and retain is the employer-provided group-coverage (paid with pre-tax dollars) while still employed. Don't retire too early unless you have built the high cost of health insurance into your plan.
There’s No Financial Aid for Retirement: Starting Late Is Better Than Not Starting at All
Starting late for retirement planning is still a good idea versus not planning at all. Social Security definitely will not be enough, so don’t ever assume it will be your safety net without any planning. Starting in your 50’s, you will have a higher climb and have to save more aggressively. After 50 you can put more in tax-deferred accounts and you will likely have more discretionary income as your major bills may stop or decline, such as your mortgage, the kids’ college tuition, loans, etc. You can also consider downsizing your car, home and overall lifestyle. As the saying goes “There’s no financial aid for retirement”.
Fialkow Financial Planning
Fialkow Financial Planning provides advisory services on a fee-only, hourly as-needed basis to people from all walks of life and income levels without the need to sell products, receive commission or referral fees, or charge based on percentage of assets under management. I believe hourly-based fees are the most objective and prudent way to provide and receive financial advice.
Investment advisor representative of and investment advisory services offered through Garrett Investment Advisors, LLC., a fee-only, SEC-registered investment advisor. Tel: (910)-FEE-ONLY. Fialkow Financial Planning may offer investment advisory services in the States of Florida and Texas and in other jurisdictions where exempted.
This communication has been provided to you for informational purposes only. Although information in this presentation has been obtained from and is based upon sources that Garrett Investment Advisors, LLC believes to be reliable, Garrett Investment Advisors, LLC does not guarantee its accuracy and it may be incomplete or condensed. This information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation.