The Fourth of July commemorates the adoption of the Declaration of Independence on July 4, 1776, declaring independence from the Kingdom of Great Britain. When considering your own financial independence, what steps can you take today to confidently declare your independence from your job and strive to live the retirement you desire?
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.
A good amount of planning is essential as many people are now living well into their 80’s and 90’s while 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. Many studies indicate the median U.S. household over age 60 has less than 25% saved to meet their desired lifestyle goals in retirement.
The following 10 strategies can help you to get on track and work to stay 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 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 to 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.
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).
3 Set SMART goals
A great saying 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. 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. Follow the rule of thumb 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.
6 Maintain Tax-Efficiency
When saving for retirement, consider 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 plan if you qualify, as many employers provide a “free” match of the first 3%-4% of your contributions. If you are self-employed, consider saving into a “pretax” Traditional IRA, Simple IRA, SEP IRA or Solo 401(K).
Next, contribute part of your savings to an “after-tax” Roth IRA with you “after-tax” savings 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 in retirement (including accounting for your Required Minimum Distributions (RMD’s) at age 70 1/2 .)
7 Invest for the long run
When considering your risk tolerance (a litmus test to your portfolio returns and volatility,) the maxim to “subtract your age from 100” to estimate how much of your portfolio should be invested in stocks can be a very rough estimate and rule of thumb to consider (but a good starting point to understand the methods of asset allocation.)
The asset allocation that works best for you at any given point in your life will depend primarily on your age, time horizon, financial objectives and your ability to tolerate risk.
Many clients we work within their 70’s and 80’s maintain a 30%-60% weighting in equities depending upon their goals in retirement. Some may need monthly income checks while many are focused on moderate capital appreciation while working to stay ahead of inflation and taxes.
The need to keep up with the cost of living over many decades 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. Consider that a cool- million dollars in cash a decade from now will only have about $500K in purchasing power.
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 lose 35% in annual benefits which can really add up over your lifetime.
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 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 based on their annual investment returns in order to have a sustainable approach.
Spending 10%/ year from your portfolio (whether in cash or stocks) will most likely result in depleting your money within 10-15 years and putting yourself and your family in a dire situation. Instead, consider following the “4% rule” for your investment income goals.
Simply put, every cool $1M dollars in savings can provide approximately $40K/year in investment income for about 30+ years from a diversified portfolio assuming a maximum 4% portfolio 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). If you want to consider a more conservative 3% distribution rate you would need savings of at least $1.7M.
10 Update your estate plan
Estate planning is about more than just transferring your assets at death to help reduce your exposure to probate and taxes. It’s about working to help secure your loved one’s financial futures and retirement goals while utilizing legal, financial, tax, healthcare and insurance planning tools and techniques.
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.
Also 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.
The most important tip when planning out your retirement is to not go at it alone. Make sure to seek the counsel and guidance of an accredited financial advisor such as a CERTIFIED FINANCIAL PLANNER™ practitioner to help you get on track and stay on track for your golden years.
For more information on our firm or to request a complementary portfolio stress-test and retirement check-up with Jon W. Ulin, CFP®, please call us at (561) 210-7887 or email [email protected].
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This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk. Loss of principal may occur.
No strategy assures a profit or protects against a loss. Investing involves risks, including possible loss of principal.