In my new book, “Rewirement: Rewiring the Way You Think About Retirement,” I lay out a detailed 10-step process that everyone can use while doing retirement income planning. Many people are not even taking baby steps to pave the way for a financially secure retirement. For some, retirement planning seems too difficult. For others, it seems like retirement won’t ever apply to them. The facts are that most workers will retire someday and, by taking a few basic steps now, they can vastly improve the outlook for their future retirement security.
A secure retirement plan is more than just savings, it’s about generating income. As Managing Director of Clear Path Financial, Brandon Levithan, CFP®, ChFC®, stressed, “Many pre-retirees have a plan to accumulate retirement assets, however, they do not have an efficient plan to distribute assets over their lifetime. There are decisions that can be made many years before retirement to create more robust and more efficient income options for retirement.”
1. Envision Your Retirement
To get anywhere in life and achieve success, you need a vision of success. Start by envisioning what you see as a successful and financially secure future in retirement. This technique of creating a mental image of the desired outcome is used by many of the most successful professional athletes and business entrepreneurs. Athletes mentally envision how the perfect race or game will play out long before they take the field. Of course, the plan doesn’t always go perfectly, but imagining the future can at least help you develop a game plan. By adopting this technique, you can set goals and realize that the future you want is achievable. Do you want to have financial independence? What does that look like for you? Does that mean you will live independently or with family? Do you want to travel, or would you prefer to stay in your community? Any retirement plan starts with setting your own goals and envisioning your desired outcomes.
2. Review Your Current Situation
After you envision where you want to go, you then need to look at where you are today. We can’t get anywhere without first acknowledging and knowing where the starting line is. If you are in the early stages of your career and just getting started with savings, how are you going to handle your investments and debt management? If you are mid-career, is now the time to really ramp up your savings, or are you in your peak earning years? As State Farm Agent Jen Sias-Lyke pointed out, “Many people hit their peak earning years in their 50s and early 60s.” But she also noted that, “The closer you get to retirement, the more focus you’ll need on planning.” So, as you near retirement, you need to see if your debt is under control, do you know what you are spending each year, and do you have a retirement date in mind?
But, for all career and life stages a few important questions always stand out. First, are you managing your debt? Second, and usually tied to the first, are you managing your expenses? The answers might mean you need to set up a more detailed budget and stick to it. Lastly, are you saving and investing appropriately? This means that you are both setting money aside for retirement and investing in assets that will provide you with returns that match your risk tolerance level. At a younger age, you should be willing to take on more risk and be more heavily invested in stocks. As you near retirement, you can take some risk off the table and invest in more bonds, CDs and annuities.
3. Calculate Your Retirement Needs
Now that you know where you are and where you want to go, you can do a quick retirement income calculation. This is crucial if you want to know if you are on track for retirement or if you need to make some additional moves and changes to improve your situation. When you are young, you can consider the basic rule of thumb: you will need approximately 60 to 80 percent of your pre-retirement income in retirement. But as you approach retirement, you will want to track what you are currently spending and adjust that amount accordingly to account for possible lifestyle changes during retirement.
4. Review Your Income Sources
Now that you have examined your income needs in retirement, you can figure out if you will have an adequate retirement income stream. If you realize that you need $50,000 a year in retirement to achieve your goals, you will want to see if you can generate that much income. Make sure you consider all your income sources including Social Security, investment portfolios, home equity and possibly remaining longer in the workforce at some level. Social Security benefits depend on how much you have paid into the system, and at what point you begin collecting benefits. Average benefits are typically around $1,500 a month but can be as high as $3,500. Making an informed and appropriate Social Security claiming decision is crucial. Another decision will be determining how to turn your savings into income and determining how much income your investment portfolio can provide in retirement. The 4 percent safe withdrawal rate is a good start, but it is not the solution for everyone. The 4 percent rule says that historically a 50 percent stock and 50 percent bond portfolio mix could generate 4 percent of available funds each year. If adjusted for inflation, this would last for 30 years before the retiree would run out of money. This means if you have $500,000 saved, you can safely generate $20,000 a year from it and not run out of money in retirement. You can get more income from this savings if you are willing to adjust spending in down market years, but it provides a good starting point.
A financially secure retirement starts with planning. Research shows that those who have retirement plans in place have a happier, less stressful and more financially secure retirement. While earning more money and saving regularly are important factors, you can improve your situation by cutting expenses, prioritizing expenses and sticking to a good plan. You don’t have to buy into all the doom-and-gloom retirement predictions. Decide to be more proactive, take the first few planning steps and begin to take charge of your financial future.