The Fourth of July commemorates the adoption of the Declaration of Independence on July 4, 1776 for America declaring independence from the Kingdom of Great Britain. With this in mind, what steps can you take to declare your own “financial independence” from the grind of the workplace and confidently transitioning to retirement?
Retiring on your own terms and not outliving your money in your “golden-years” takes a greater amount of effort and resources today than in decades past. Most of us will not receive a pension or inheritance nor will be lucky enough to hit the lottery when stepping off the “rat-race” of life.
With the ongoing COVID19 pandemic, historically low interest rates and potentially higher taxes, retiring over the next year may look a bit more of an uphill battle this year than for retirees of decades past. Without diminishing the human, financial and societal toll this pandemic has taken, even in better times, a good amount of planning is essential with many people experiencing a retirement longer than their working years.
Unfortunately, we live in an “instant gratification” society fueled heavily by social media and do not worry about our own financial well-being. Neurological studies have found that when we think about our “future self,” we might as well be thinking of a complete stranger.
Individuals are so focused on just “getting by” today in the grind of life – they are greatly surprised by how fast retirement arrives. While financial experts advise that the average 65 year old today have between $1 million and $1.5 million set aside for retirement, the realities for most are far from any seven-figure retirement nest-egg.
According to a 2018 study by Northwestern Mutual, the average retirement account for those age 55-64 is $374,000 with the median retirement account: $120,000. Even more disturbing, a third of Baby Boomers currently in, or approaching, retirement age have between nothing and $25,000 set aside
Truth be told, there is no single “golden rule” to retirement, as not outliving your money involves multiple factors in addition to taxes and investing risks – including your age, health and standard of living. Even the car you drive and the location of where you decide to live can be a big factor, as someone retiring downtown in a big city may have different obligations to meet than someone retiring in a rural area.
The following 10 strategies can help you to get on track for your financial independence. They are not meant to be “one-size-fits-all” procedures, but guideposts to help you along the way.
1 Plan wisely
Create a written retirement plan with a financial advisor to help chart out your retirement roadmap and options along the way. This will help determine the realities of your current financial situation while holding yourself accountable for your short-term actions – like a diet or fitness regime.
By writing down your goals and numbers on paper you may develop a more realistic picture of where you financially stand to achieve your objectives by a specific age, along with a retirement cash flow analysis and investment projections through your expected lifetime.
Some significant costs like 401(K) savings, life insurance, income taxes, home-mortgage payments and kid’s expenses may decline in retirement – while you may end up spending more money on health care premiums, travel, food, entertainment and potentially helping out other family members.
2 Benchmark your net worth
Tracking your household cash flow and net worth (like a small business) can help you better benchmark your progress over time. There are many tools you can utilize to accomplish this from “old-school” excel spreadsheets to apps like mint.com. We provide our clients access to their very own E- Money client website portal with live updates and feeds as part of our Plan your Best Life™ approach.
The book “Millionaire Next Door” offers a rudimentary formula for determining whether you have a net worth that is commensurate with your age and income. Simply multiply your age times your income and divide by 10 to determine your number (age X income/10). By this example, a 45 year-old earning $150K/year should target a net worth of $675,000. (45X$150K/100).
3 Set S.M.A.R.T. goals
Jon here. My own principle is that “what gets measured gets done.” To make your retirement goals S.M.A.R.T., they need to conform to the following criteria: Specific, Measurable, Attainable, Relevant and Timely. Visualize and define your lifestyle goals for retirement “outside the numbers” to better utilize your time and resources productively to help you get on the path to success.
Be specific down to your where you plan to live along with planned hobbies, health, fitness, travel, friends and family goals. What do you want to do with all your time in retirement? Maybe you will want to train for a 5K, travel more, start a small business or take up a dance, art or yoga class.
The cliché pictures of retirees golfing and fishing along with taking endless cruises to the Caribbean has morphed into a more active lifestyle as boomers are ‘redefining’ retirement. Staying active in your golden years can help you to live a more enjoyable life and spend less on medical care and expenses. Our maxim is that “your health affects your wealth and your wealth affects your health.”
4 Target your “number”
Do you know about how much you will need lump-sum to retire? Consider the following “savings factors” rule of thumb coined by Fidelity. Aim to save at least 1x your annual income by age 30, 3x by 40, 6X by 50, 10x by 60 and 13X to 15X your annual income by age 65.
If you do not expect Social Security to be fully intact by the time you retire, you may need to save even more.
For example, if your current salary is $80K per year at age 65, you would need approximately $1 Million dollars in lump-sum savings to meet your retirement lifestyle expenses in addition to your Social Security income to replace just 65%-70% of your gross income. Make sure to adjust these numbers for inflation.
Simply put, 50% of a person’s pretax retirement paycheck may need to be replaced by savings, including pensions, with the balance covered by Social Security for a single person or couple among other factors.
5 Put your savings on “automatic”
It may be problematic if your “emotional brain” reacts to the words save and budget as it reacts to the word diet with associations of anguish and deprivation. Work around your “money brain” by putting your savings on automatic.
Remember to always “pay yourself first” from every paycheck. Our textbook rule of thumb is to save 15% or more of your annual income for retirement between both “before tax” (retirement) and “after tax” (taxable) accounts. If you are only 5-10 years from retirement you may need to ramp up your savings to 20%-30% if possible to help better meet or surpass your retirement savings targeted number.
6 Maintain Tax-Efficiency
When saving for retirement, consider our (60/40) rule of thumb by earmarking 60% of your cash savings from every paycheck in “pre-tax” (retirement account) buckets for tax deductions and tax-deferred growth, and 40% of your cash savings into “after-tax” (taxable) buckets.
Utilize your employer’s “pre-tax” 401(K), 403(B) or 457 retirement plan if you qualify to help reduce taxes and potentially receive a “free” employer match. According to the Bureau of Labor Statistics, the typical or average 401K match nets out to 3.5%. If you are self-employed, consider saving into a “pretax” Traditional IRA, Simple IRA, SEP IRA or Solo 401(K) if applicable to your business.
Next, contribute part of your savings to an “after-tax” Roth IRA if you qualify. Finally, make sure to earmark part of your annual savings goal to an “after-tax” investment account to provide greater liquidity and tax efficiency on distributions before and after you retire.
By utilizing “pre-tax” and “after-tax” savings buckets, you can create greater liquidity and a more balanced tax structure of money before you retire while providing greater flexibility to manage taxes and distributions through your retirement years.
7 Invest for the long run
One of the most basic principles of investing is to invest more aggressively when you are younger (as time is on your side) and then gradually reduce your risk as you get older since retirees don’t have the luxury of waiting for the market to bounce back after a dip. Essentially your age, time horizon, stage of life and ability to stomach risk can all be determinant factors for your investment strategy.
When considering your risk tolerance level, the rules of thumb to “subtract your age from 100” or ‘invest your age in bonds” to estimate how much of your portfolio should be invested in stocks can be a very rough estimate to consider. By example, a 70-year-old may consider targeting 30% to stocks, and a 30-year-old would target 70% to stocks.
The goal to keep up with the cost of living over many decades through your golden years cannot be accomplished by being too conservative in cash, CD’s and bonds. Your cost of living will go up by about 50% every decade just based on an average 3.4% inflation rate. By example, a retired 65-year-old with an $80K/year household cash flow goal may need closer to $120K/year when he or she turns 75.
Consider that a cool- million dollars sitting in cash a decade from now and not invested will only have about $500K in purchasing power also based on a 3.4% inflation rate, which demonstrates the deteriorating effect of inflation on capital.
8 Maximize Social Security
By delaying enrollment in Social Security (from 62 up to age 70) the greater your annual benefit will be. You may forfeit about 7% per year in Social Security income benefits if enrolling before your full retirement age (FRA). For example, if your FRA is 67 and you retire at 62, you would forfeit approximately 35% in annual benefits which can really add up over your lifetime.
While it may be logical (and mandated) to enroll in Medicare at age 65, enrolling in Social Security for individuals and couples takes a bit more research and planning, as there are a ton of options to consider.
By delaying retirement, saving more and taping your nest-egg later in life, you may also reduce the chance that you may outlive your money. If you are married, divorced, a widow or widower, you may also want to review any Social Security spousal benefits that may apply to your specific situation.
9 Create a retirement paycheck
A top concern for many retirees today is keeping up with the cost of living and not outliving their money. At the same time, many retirees do not understand how much money they can “safely” withdraw from their principal in order to have a sustainable lifetime- income approach.
”Winging-it” and not having an income plan for retirement, or spending 10%/ year from your portfolio (whether in cash or stocks) could result in depleting your principal in about 10 years (or less due to market losses.)
Consider the “4% rule” for retirement income. The 4% rule is a rule of thumb utilized to establish how much a retiree should withdraw from their savings each year from a diversified portfolio to last 30+ years. This rule seeks to provide a steady income stream to the retiree with annual increases for cost of living adjustments (COLA).
By this example, every $1M dollars in savings can provide approximately $40K/year in investment income from a diversified portfolio assuming a 4% distribution rate.
To determine your “lump sum” goal for retirement income, simply divide your annual income goal by 4% (or multiply by 25.) For example, if your need is $50K/year in investment income in addition to Social Security and other income resources, you would need a lump-sum of $1.25M dollars ($50K/4%) or ($50K X 25).
-This contains a hypothetical example and is not representative of any specific investment. Your results may vary. The Hypothetical rates of return used do not reflect the deduction of fees and charges inherent to investing.
10 Update your estate plan
Estate planning is about more than just transferring your assets at death and working to reduce your exposure to probate and estate taxes. It’s about working to help safeguard your financial future, savings and retirement goals while utilizing legal, financial, tax, healthcare and insurance planning tools and techniques that apply to your own situation.
Execute your “basic documents” including a living will, durable power of attorney and medical power of attorney along with your HIPPA release form. Provide guardianship instructions for minor children or adults under your care in your last will and testament along with instructions for everything from the administrator of your estate and trust to the care of your pet and digital assets.
Make sure to review your health, life, disability and long-term care insurance coverage to protect your health, wealth, family and retirement goals. Many people plan a vacation, but they don’t plan for the worse, or are in denial of what could happen to them.
Consider that everything that happens in life is a small part of our journey. We can choose to be passive or we can be proactive and not leave things to chance.
In our opinion, the most important tip when planning out your retirement is to not go at it alone. Seek the counsel and guidance of an experienced financial advisor such as a CERTIFIED FINANCIAL PLANNER™ practitioner to help you get on track for the next chapter of your life.
You cannot invest directly in an index. Past performance is no guarantee of future returns. Diversification does not ensure a profit or guarantee against loss.
The information given herein is taken from sources that IFP Advisors, LLC, dba Independent Financial Partners (IFP), IFP Securities LLC, dba Independent Financial Partners (IFP), and its advisors believe to be reliable, but it is not guaranteed by us as to accuracy or completeness. This is for informational purposes only and in no event should be construed as an offer to sell or solicitation of an offer to buy any securities or products. Please consult your tax and/or legal advisor before implementing any tax and/or legal related strategies mentioned in this publication as IFP does not provide tax and/or legal advice. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation, or needs of individual investors. This report may not be reproduced, distributed, or published by any person for any purpose without Ulin & Co. Wealth Management’s or IFP’s express prior written consent.