This new year, are you asking yourself when you can finally quit your day job?
We’ve all dreamed of it: waking up without an alarm clock, doing anything we want to do all day long, no schedules, no meetings, no boss, just time to relax and enjoy ourselves. That’s what retirement should be. Unfortunately, more and more Americans are finding themselves headed back to work after retirement because they didn’t plan well or save enough. According to the 2013 Household Financial Planning Survey and Index less than 1 in 10 households are financially prepared for retirement. But, it doesn’t have to be a doomsday scenario. With the right planning, the help of a skilled financial advisor and a little luck, you can avoid common mistakes, draw a clear picture of your finances and retire without worry.
What mistakes do people typically make when planning for retirement?
“Far and away, the most common mistake is not starting a retirement plan soon enough through an IRA or an employee-sponsored plan”, says Michael S., a retirement planner from Florida. The power of compounding interest over time is difficult to match by “catch-up” contributions later in life. So, start early and let the money work for you! Even if you are already in your 40’s or 50’s it’s better late than never, and there are catch-up contribution rules that can help.
“Another common mistake, especially for younger workers, is being too conservative in their investments. The difference between total returns over 30 years can be incredible, with just a 2% or 3% difference in the rate of return.” This is where a professional, skilled financial planner who has your best interest in mind can help. Choosing the right combinations of investments – IRA’s, stocks, bonds, annuities, real estate, insurance policies – can make a huge difference in both the quality and size of your retirement funds as well as the amount of tax you will pay during retirement.
So, how do I plan right?
Retirement will be different for each person, and there is no magic plan that works for everyone. However, there are some “rules of thumb” that have surfaced during the past couple of decades:
- The 80% income replacement rate – meaning to have the same standard of living you had while working, you should plan to have retirement income equal to 80% (or 75% or 85%, depending on who you listen to) of the income you were making before you retired.
- The 4% systematic withdrawal plan – knowing when to take withdrawals and how much at various ages. Withdrawing just 4% of your retirement funds each year should get you through 30 years of retirement.
- Assets over liabilities ratio – the difference between your fixed/guaranteed annual retirement income and your expected annual retirement spending. Author Michael Edesess (The Big Investment Lie) recommends you invest 33 times that difference in order to have enough to retire.
But, don’t be fooled.
Like Captain Barbossa said in Pirates of the Caribbean: they are “more what you’d call ‘guidelines’ than actual rules.” For example, the 4% withdrawal plan rule was made in 1994 when the markets were roaring. Today, some experts argue it should be closer to 2% a year. And the 80% rule depends completely on what your retirement lifestyle looks like and could be way less if you’ve paid off your mortgage and school loans. As in all of life, circumstances change and so do rules.
Prepare for healthcare and a long life:
A financial planner once reminded me that I was much more likely to become ill or disabled than to just drop dead one day. After all, life expectancy continues to rise in the U.S. Yet, we all have life insurance but very few of us have long-term care insurance. The most costly (and often most surprising) expense of retirement is health care, including premiums for Medicare and supplemental insurance. And if you retire early and don’t have a company-sponsored health plan, you’ll need to consider how to pay for premiums until Medicare kicks in at the age of 65. Retirees today can expect to spend between $220,000 and $400,000 for out-of-pocket health care costs.
Plan for some fun, too:
In addition to the necessities, how you choose to live your retirement life can impact your expenses. If you move to a place where “everyday is Saturday” and you have time on your hands to go to the theater, play golf, meet friends for lunch and dinner and drinks, your expenses may end up being more than anticipated. What if you want to travel (who doesn’’t?) or dote on those grandchildren? It all adds up to quality of life for you.
The bottom line is:
Retirement planning is highly personal. No two retirement plans or portfolios will look the same. Each individual (or couple) needs to assess what they have and what they want their retirement to look like, calculating their essential and discretionary expenses and determining if they have enough guaranteed income to meet their retirement expenses. Take into account that there may be taxes on retirement income/withdrawals and potential loss of income if one spouse dies. But with some careful planning and good research, you’ll be able to live the life you want in your golden years.
So, don’t delay. Talk with your tax advisor (that’s us, people!) and an honest, skilled professional financial planner, like our own Chantal Sheehan, today. They can help you sort out all the financial stuff and guide you to your dream retirement. In the end, only you can make the decision as to whether you are ready to retire.