Whether you’re just beginning your career or are approaching its final stages, planning for your retirement now is essential. Though it may seem like a daunting task, it’s never too early or too late to start setting up strategies and putting a well-designed retirement strategy into motion.
It’s integral to ensure you provide yourself with enough retirement income to be able to live and maintain the lifestyle you desire. That includes taking into account increased cost-of-living expenses, taxes, inflation and the returns you expect on your investments. With proper execution, entering the next phase of your life is easier than you think.
But how do you find the roadmap to retirement success? What steps must be taken to get you started? Here are nine proven retirement strategies designed to help plan your successful retirement:
Even if you start small, nothing beats starting early when it comes to compound interest.The annual interest you earn on your principal retirement savings also earns interest. That means, no matter how small your initial investment may be,it continues to increase in size over time. So the earlier you start saving, the earlier you start earning additional funds, whether you make ongoing contributions or not.
Pay Yourself First
There are two types of people: those who spend first and save later and those who save first and then spend what’s left. The second type usually ends up with a larger retirement nest egg.
Saving for retirement is similar to paying your bills. When you get a paycheck, you pay your bills first and the remaining income is what you have to spend on flexible expenses, such as food, clothing, entertainment, etc. If you treat your retirement savings like a bill and deduct it from your paycheck immediately, you ensure you routinely save a specific amount. If you have a plan for saving and you stick to it, you set yourself up for a successful retirement.
Keep A Budget
The vast majority of people planning for retirement underestimate how much money they need each month when they retire. If you know what your monthly expenses are before you retire, you’re able to begin planning successfully.
It may actually be more difficult for those who have never had to live on a budget. Even if you don’t have to watch every penny, start keeping a record of what you spend monthly -- including fixed expenses (mortgage or rent, utilities, taxes, insurance, etc.) and flexible expenses (food, entertainment, transportation, etc.). Recording your expenses lets you know exactly what you need each month, while also giving you the added benefit of potentially reducing your overall expenditures.
Take Advantage Of Tax Deferred Plans
One way to enhance your retirement savings is to take advantage of opportunities that reduce the impact of taxes on your investments. Tax deferred retirement plans, such as an employer-sponsored 401k or an IRA, help your money grow quicker and increase the power of compound interest earnings. However, keep in mind that once you begin withdrawing from your accounts, you’re required to pay taxes.
Make sure you take full advantage of any contribution match offered by your employer. The money you contribute to your 401k typically comes out of pre-taxed dollars, meaning you don’t report them as income on your tax return. Avoid borrowing against your retirement investments or withdrawals, as taxes are imposed in these cases.
Focus On Income Potential, Not Account Balance Factors like taxes, investment returns and inflation are going to affect how much you’re able to actually buy with the money your retirement savings has accumulated.
Contrary to popular belief, there is no magic number that allows you to retire successfully. It is the amount of monthly income it can create that is important.
Account balances that still have taxes due won’t go nearly as far as account balances that have already been taxed, so it’s extremely important to make investments that continue paying returns long after you retire. A one percent difference in average annual returns has a huge impact on how long your retirement savings lasts.
Time Horizon Your time horizon -- the expected time you have to invest towards a financial goal for retirement -- determines the type of investments you’re going to make. If you have decades until retirement, you’re more likely to feel comfortable taking on riskier investments, as you won’t feel the pressure of waiting out slower economic cycles and the inevitable ebb and flow of the market. However, if retirement is imminent and you need the money for retirement income, you want to make safe, low-risk investments.
Asset Allocation By diversifying your portfolio, you reduce your risk and increase your reward. Asset allocation involves dividing your investment portfolio among a mix of assets -- stocks, bonds, real estate, cash and equivalents -- in order to protect you from yourself. As the price of stocks, bonds and real estate fall and rise, it’s easy to panic and be quick to sell off your assets out of fear of losing too much.
If you lose money one week, chances are you may make it back the next week, month or year. The problem is if you sell a stock, bond or real estate at the lowest price you won’t own it when the price rebounds. The panic point may be different for every person and situation, but almost everyone has a point at which they say: “I can’t take it anymore, sell everything!”
The real benefit of careful asset allocation is to allow you to remain calm and not panic. If your portfolio is made up of 50% of stocks and stock prices fall by 60% but everything else stays the same, you lose 30% of your total portfolio. This is obviously not ideal, but hopefully this is below the point at which you panic and sell everything. Now compare this to a portfolio that has 90% in stocks. If stock prices fall 60%, your total portfolio loses 54%, a much more significant loss. Depending on your time horizon and your earning potential, this could be enough to make you panic and sell too low, severely damaging your retirement savings.
Plan On Living A Long Life The goal is not to retire; it’s to stay. When you determine how much you need each month make sure you include an inflation factor -- historically averaging 3% -- to project how much you need to maintain your buying power.
Inflation over a 25-year retirement has the ability to destroy your retirement savings. Think about how much you spent on household items and entertainment 20 to 25 years ago. Everything costs much more now. In 1982, a carton of eggs cost approximately $0.84 and movie tickets averaged around $2.90. Today, that same carton costs just under $2 and those movie tickets start at $7.50. Are you going to be prepared for prices 20 years from now?
Insure Your Retirement
In addition to your typical monthly expenses, health care costs -- specifically long-term care -- may be the biggest threat to a successful retirement. Estimates for cost and length of a long-term care situation are difficult to evaluate and many reports say that upwards of 70% of the population are going to need some form of long-term care.
If you require long-term care for three months at the end of life, your savings may likely be sufficient enough to handle the cost. But what if you need care for seven years? How would you afford it? Government programs offer some help, but usually only after you have depleted your assets.
There are several ways to insure against this problem, such as long-term care insurance policies, life insurance polices that feature accelerated death benefit riders and other hybrid policies. Each of these options has merit. Contact your financial professional for help in evaluating these policies.