Updated: March 8, 2020
“If you have $1 in your bank account on the day you die, you had more money than you needed in your lifetime to live.”
This quip brings perspective and can reinforced one extremely important aspect of retirement: ‘putting together a plan and sticking to it’ is vitally important.
Life is unpredictable, so any plan you make for retirement has to be flexible and you must accept the undeniable fact that you can’t control everything life delivers can afford personal freedom and peace of mind in retirement.
Retirement is a great time to discover new passions and interest by taking classes, finding one-on-one instruction, or joining groups and organizations. The key to a happy retirement isn’t how much free time you have, it comes down to how well you’ve planned for retirement and how you manage whatever free time you have.
There is adage in business management…‘you can’t manage what you don’t measure’. This adage is true for business management, and is also true for personal finance and retirement. You cannot manage your personal finances or your financial readiness for retirement unless your measuring your current financial status and progress.
It is important to measure those financial activities or results that are important to successfully achieving your personal financial goals. The time to plan for retirement is now. Planning for retirement starts with having a ballpark idea of longevity and how much money you will need in retirement. Yet, many Americans are not financially prepared or have planned for their post-working years. Only 54 percent of non-retired respondents to the FINRA Investor Education Foundation’s National Financial Capability Study (NFCS) said they have some kind of retirement account.
42% of Americans have saved $10,000 or less for retirement
This statistic suggests a significant number of Americans aren’t on track to meet their retirement goals. That shouldn’t be surprising given the plethora of potential obstacles: Pensions are less common and health care costs continue to skyrocket higher. Additionally, you may need to figure out how to put your kids through college, but you might be paying off your own student loans or credit card debt at the same time.
If you’re off track, you can take a few simple steps to get right back on the road.
- Save as much as you can, as often as you can. If you’re years away from retirement, you’ll likely benefit from the compounding effect.
- Stay in the workforce longer (more on that in a moment) or decrease your living expenses. This may be an especially viable option if you’re close to retirement.
- Plan and focus on what you can control and what’s important to you—planning provides perspective on what you can do to meet your goals
- Financial experts advise that equities need to be a larger portion of retirees’ portfolios during retirement for several reasons including longer life expectancy and lower interest rates.
Retirement readiness is achievable by most Americans. But, it requires that Planning and being financially prepared for retirement become a key priority for American families. Yet, research reveals that a majority of Americans are not confident they are financially or emotionally prepared for retirement. Additionally, only about one third have an actual plan in place. Nearly a third worry they will outlive their retirement savings and many already plan to work part time during retirement.
Longevity
Use the Social Security Administration’s Life Expectancy Calculator to help determine how many years of retirement you might need to plan and save for. As a rule of thumb, a retiree should expect to live thirty (30) to thirty-five (35) years in retirement.
How Much Money
Many retirement experts estimate you’ll need between 70 and 85 percent of your pre-retirement income to maintain your standard of living after you stop working. But that formula might be too simple, and possibly too low, to account for what you’ll actually spend. For instance, you may require more if you have expensive hobbies or plan to travel a lot. You may also need more if you or your spouse are in poor health and have substantial medical expenses.
Retirement Planning
Only 1 out of 10 workers has prepared a formal financial plan
Without a plan, you may be more prone to react to market events, and you might even make rash decisions. A plan provides perspective, brings clarity to your current situation, and shows you how to make changes to your spending and saving habits. It can give you knowledge to accept responsibility for your life and the confidence to address the unknown and market volatility.
Retirement Planning Requires a Plan
“The goal of retirement planning is to create a plan. It feels silly to come out and say that, but from what I’ve seen, most investors never actually take the step of creating a concrete plan. Instead, they read a few articles about various retirement planning topics and they leave it at that. (And many investors don’t even do that much.) The more specifically you’ve planned how you’ll manage your portfolio — and your finances in general — the less likely it is that you’ll have to go back to work or dramatically reduce your spending later on in retirement.” Mike Piper, Can I Retire? How Much Money You Need to Retire and How to Manage Your Retirement Savings, Explained in 100 Pages or Less
Individuals have to take responsibility for their financial security after retirement. Unfortunately, the majority of Americans do not appear to have done much retirement planning. Forty-one percent of FINRA Foundation NFCS respondents have tried to figure out how much they need to save for retirement, while 54% have not. The act of planning for retirement has proven a strong positive indicator of retirement wealth.
When putting together a retirement plan, goals “must-have” essential expenses should take precedence over “nice-to-haves” or discretionary expenses.
Workers who were able to retire by choice were happier than ones whose retirement was thrust on them: 69 percent of the retirees who retired by choice were satisfied with their lifestyle but only 36 percent pushed into retirement said they were satisfied.
The happiest retirees are engaged in some kind of meaningful activity or actively employed, are in good health and are more connected in the physical world. In short, activities and social engagement are good for a retirees health and wellness.
The happiest retirees “eat well, sleep soundly, play often, exercise at least three times a week and maintain strong social connections. The happiest pre-retirees and retirees believe “good health” as the No. 1 key to happiness in retirement.
Save smart in accounts earmarked for retirement.
Whenever possible, use tax-advantaged savings accounts like 401(k)s to save money on taxes and boost retirement security. Contributions to a traditional 401(k) are not subject to income tax withholding and are not included in your taxable wages—and earnings on Roth 401(k) contributions are tax-free. In 2020, contribution limits increased, so you can contribute up to $19,500 to your 401(k)—and if you’re aged 50 or over, you can contribute an additional $6,500 for a total of $26,000.
Any day is a good day to start, or increase, your retirement savings and investing, and step up your planning. Understand that saving and crafting a plan for retirement is a long-term process.
References:
- *https://money.cnn.com/2018/03/16/retirement/average-retirement-savings/index.html
- http://fortune.com/2018/04/18/americans-save-less-than-10000-for-retirement/
- The National Financial Capability Study (NFCS) is a project of the FINRA Investor Education Foundation (FINRA Foundation).
- https://www.retireonyourterms.org/about-us
- https://vanguardblog.com/2018/11/08/financial-worries-start-planning/