Retirement Planning

Someone has said that the retirement years can be the most enjoyable and satisfying years of our lives if properly planned for BUT those same years can be the most frustrating, grinding years of our lives if not properly planned for.  The difference is simply making and maintaining plans for our future.  The choice is up to you.  But maybe you’re not sure where to start.  Here are some things to consider to help get you started on this adventure. Yes, it is an adventure – enjoy the journey!

Here are some not-so-fun facts from the government:

• Only half of Americans have calculated how much they need to save for retirement.  (But if you prepare now, you won’t be in that unfortunate group!)
• In 2020, more than a quarter of private industry workers with access to a defined contribution plan (such as a 401(k) plan) did not participate.  (But you’re smarter than that, right?)
• The average American spends roughly 20 years in retirement.  (That’s a long time to spend wishing you had been better prepared!)

IS RETIREMENT PLANNING REALLY FOR ME?

The answer is a resounding “Yes!”  Really? Read on: “I’m young and have just started my career.  Do I really need to start Retirement Planning now?”  Yes!  Or, “I’m 20 years away from retiring, my kids are in High School, is this really something I should be thinking about?”  Yes!  Or, “I’m looking forward to retiring in the next few years.  Is there really any point in doing Retirement Planning now at this late stage in my employment?”  And Yes!  Experts in the field agree that people should be thinking about their retirement at virtually every stage of their working lives.  But the approaches they take will differ depending on which stage of life they are in.  For example, early in one’s career, money may be particularly tight.  They may be at the lowest level of their earning power, trying to buy a first home, starting a family, etc.  On the other hand, someone nearing the end of their working career will probably already own their home, kids are up and gone and so on.  Obviously, the two cases will require very different approaches.  But the important thing is to get started on your approach now!  So, what are you waiting for? Let’s get started!

STEP 1:  ENVISION YOUR IDEAL RETIREMENT

The first step on every project is to envision the result.  Or, to put it another way, “Begin with the end in mind.”  If you’re building a new deck for your home, you want to think about how big it will be.  What materials will you use?  Who will perform the work?  And on and on.  Planning for your retirement is no different.  Write down how you envision your ideal retirement (and talk about it with your spouse, if married).  What do you want to do in your Golden Years?  Do you want to travel?  Serve a senior mission?  Move closer to (or away from!) your kids?  Go back to college and pursue that dream field of study? Start a business or volunteer at any number of charitable organizations?  Develop a new talent or hobby?  Do genealogical research?  Work in the Temple?  The opportunities are endless!  One writer suggested writing a “bucket list” of things you want to do.  We would highly recommend that approach.

With that vision (think: your bucket list) clearly in mind, identify how much money you will need to fulfil each of your dreams?  The number will be different for each goal but try to develop a realistic budget for each item you’ve identified.  Add it all up and take a hard look at whether you will be able to pay for all of it.  One expert says that people that reach the age of 70 consistently spend less money each year as they get older.  Are there health limitations you have now that will impact some of your goals? 

Take into consideration things that are basic to living life.  Where do you want to live?  Will you stay in your present home?  Is it too big?  Too many stairs?  Too far away (or too close!) to family?  Too cold a climate?  Too hot?  Is a retirement community attractive to you?  Can you care for (or want to) maintain your home, cars, property, etc.?

All of these things will combine to give you a clearer picture of your ideal retirement life vision.  And, you’ll at least have an idea of the cost feasibility of your retirement dreams.

STEP 2: HOW AM I GONNA PAY FOR ALL OF THIS? 

By now, you may be suffering from a little “sticker shock”, but let’s look at how you can make all this a reality – without having to rob Fort Knox!  Let’s identify what resources you may have that, perhaps, you haven’t even thought about.  Please note that the suggestions that follow are based solely on generally accepted financial advice and are not intended to be appropriate in every case.  As in every investment venture, it is always wise that one consults a trusted professional investment advisor as to any specific situation.

First, let’s look at what your employer may have already set aside for your faithful service over the years.  Does your employer have a pension plan in place?  Today, pension plans are becoming more scarce in favor of company sponsored investment plans, but maybe you are one of the lucky ones who can still benefit from a company pension.  If so, ask your Human Resources department for details about what their plans are.  For example, are you “vested”?  Usually, vesting means that you are qualified to receive benefits from a company sponsored pension plan.  Some companies require you to be employed for a few years before you are vested.  In that case, it may be to your advantage to remain employed for another year or two to become eligible for a pension.  That can provide big benefits over the rest of your life.  Generally, the longer you work for a company, the greater the payments the pension will pay.  But, again, your Human Resources department can give you guidance on what works best for your situation.  Also, check to see if the pension plan “maxes out” after a certain age or number of years of service.  That means there may be a maximum dollar amount that the plan will pay, regardless of the number of years of service after a certain age or number of years at the company.  Another big thing to consider is what options you have when you do take your pension.  Some plans offer an option (usually the highest payment) if only the retired employee is covered, and benefits will end when the employee dies.  This normally pays the highest monthly dollar amounts but risks leaving a surviving spouse without any benefits if the employee should die first.  A more popular option may be that the benefits continue to be paid as long as either the employee or the spouse are alive.  The payment is usually less than in the previous case, but it can assure that both the employee and spouse have an income as long as either remain alive.  Yet another option is a “cash buy-out” where the pension pays a one- or two-time bulk payment.  This can be a very large payout but one that must be managed carefully to ensure that income tax obligations are minimized, and that the funds are carefully managed to ensure that the money is available throughout the retirement period.  This may appear to be the largest payment, but it also may carry the largest risk of mismanagement or poor judgement on the part of the retiree or spouse.

Today, many companies, usually in lieu of a pension plan, allow the employee to set aside part of their earnings each payday into a company sponsored investment plan.  A common question that is often asked is, “How much I should put away each payday.”  A frequently used rule of thumb is about 10% of the employee’s earnings.  Note that there are many reasons that this amount may be way too much or way too little.  A person’s sound judgement, perhaps with help from a trusted advisor, will usually help a person find the right dollar amount to set aside for their situation. These investments may be in the form of a traditional IRA (i.e., 401K) or a Roth IRA.  In the traditional IRA approach, the money set aside from the paycheck may be directly invested, which will reduce the tax on each paycheck.  When the money is withdrawn the distributions are then subject to taxes.  In the Roth IRA, the money set aside is first taxed, but when it’s time for withdrawals, the gains are essentially tax free.  Each approach has advantages and disadvantages, but both are useful financial tools.  Generally, there are regular reports issued as to the value of the accounts as the investment proceeds through the employee’s career.  Another important thing to consider is whether the company will match the employee’s investment amount.  These can be significant and sometimes amount to matches from 25% up to 100% or more.  This amounts to getting “free money” from the employer and can significantly increase the value of your retirement portfolio.

Often, these IRAs can offer several choices for investing your money.  They range from fixed-rate investments, which are virtually risk free but pay the least gains.  Other options include the ability to invest in stocks, sometimes including company stock, and bonds.  These plans often offer the flexibility to change the type of investments chosen on a semi-annual or annual basis.  Which are the best choices for most people?  A common approach is to invest in higher gain investments early in the career, such as stocks and bonds, with their attendant higher risk and then to gradually invest in lower gain investments later in the career.  The reasoning is that one can absorb greater risk earlier in the employee’s career, where there is more time to recover from the inevitable market downturns and then take less risk later on when there is less time to recover from losses.  A final word of caution:  once invested, there are severe penalties for taking out money early, except for extreme emergencies.  Seek professional advice before ever taking money out of your account early.

Yet another resource that is very important to consider is if there is a company sponsored contribution for paying for health insurance in retirement.  This can reduce the family’s health care costs significantly and becomes even more important as health care costs continue to rise and the potential for expensive treatments increases as the insured ages. 

Still other options include purchasing Long Term Care insurance that can help cover very expensive long term care costs such as assisted living, nursing home or hospital care that would otherwise severely impact one’s retirement funds.

Most Americans participate in Social Security, either as contributors during their work years and later as recipients beginning at retirement.  There is considerable concern about the long-term viability of this government sponsored program, but the consensus is that it will remain in place for the medium term although there may be some modifications in the future.  In any event, it currently remains a significant contributor to a retiree’s investment portfolio.  A frequent question that comes up is, “When should I begin to take out my Social Security benefit?”  Essentially, the earlier that one takes out the benefit, the smaller the monthly payment will be and the longer one delays taking the benefit, the larger the monthly payment will be.  Interestingly, based on mortality rates, the total amount of money received during retirement changes very little whether money is taken out earlier or later.

Other significant resource contributors can be disability payments, or other government programs. And don’t forget income from inheritances or cash gifts from others, as well.

Finally, some consideration should be given to having trusted third-party advisors to assist in making some of these decisions.  This is critical because some of these decisions, once made, are not reversible.  A poor decision made early, perhaps in haste, may have negative effects for the rest of a retiree’s life and that of his or her family.  A person can avoid significant losses simply by following the old adage, “If it sounds too good to be true, it probably is”.  In other words, avoid any investment in anything that you cannot afford to lose in its entirety.  There will always be scammers and crooks that will promise a more than reasonable rate of return on your money, only to leave you with little of your hard-earned money to show for it.

STEP 3: NOW, LET’S GET STARTED!

Ok!  You’ve done all the hard work.  You’ve helped crystallize your goals, your dreams, your most heart-felt desires!  You at least have a reasonable estimate of how much money you are going to need to make those dreams a reality.  And you’ve considered and thought through how you can pay for all of these wonderful things you’ve always wanted to do. Now, let’s make it happen!

Spend time with your spouse / significant other and make an evening out of it.  At first, it may feel a little awkward but remember the goal is to create your ideal future retirement.  As you counsel together, you will undoubtedly find that you have unanswered questions.  Great!  Work together but don’t be afraid to seek professional help.  That may come from your Human Resources department, from your parents, your trusted friends, a financial advisor, whatever!  Go on-line and type in “Retirement Planning”.  You’ll be amazed at the volume of useful information.  Select the best of the bunch.  The government also has some worthwhile information, along with links to other trusted sources.  Once you’ve completed your plan, put it away and return to it later.  Sleep on it!  Did you find that some of your goals weren’t as important as they seemed at first?  Terrific!  You’re making important progress, refining your plan.  Once you’re happy with it, put it away with your financial stuff and take action!  Sign up for any benefits or savings programs you haven’t already done at work but now need to.  Visit with your Human Resources department, asking questions about specifics regarding your unique situation.  Basically, just get things set up, so you can just sit back and relax with the assurance that you’ve taken an important step towards making your dream future a reality.  Now, make a note in your calendar to re-review your plan together as appropriate, at least on an annual basis.  Look, life changes things all the time.  Your plan is “not set in stone”; feel free to modify it, improve it, polish it and know you have earned the right to control that which you can control!  It probably goes without saying but here’s a word of caution:  Once you’ve started saving or investing your money – leave it there!  Don’t succumb to the temptation to pull out some money for that shiny new bauble you really like but don’t really need.  Remember, you’re only robbing your future retirement dreams.  Don’t do it!

IN SUMMARY

If you’re just starting out in life, know that you’ve just started a journey.  No doubt there will be changes in the future, but you can face them with the confidence that you’re headed in the right direction.  Most of the time the changes will be just small course corrections and you can handle these easily.  Occasionally, you may need to make some significant updates to your plan due to changes in your family, employment, health, relocation of your home, or whatever.  Even in these circumstances, you will be moving from a firm foundation to a new one and you’ll be better prepared for the changes to come because you’ve already thought some of these things through.  In any event, you have earned the right to move forward with confidence. One of the great advantages you now have is you have the power of compounding on your side.  Any seemingly small savings you’ve managed to set aside will grow exponentially because you have the time to take advantage of the principle of compounding.  Congratulate yourself!  You’re well on your way to a great future!

If you’re in the middle of your career, things have settled down some in your life.  Your retirement is still 10 to 20 years away, and if you’ve got a plan in place you’re off and running and success is just waiting down the road.  If you’ve put off preparing for your retirement, get started now.  You can still benefit from the principle of compounding, and you are probably able to save more money than you could when you were just starting out.  Good for you!  Do a little cash savings catch-up and you’re all set!

Finally, if you’re nearing retirement; if you’ve already set yourself up, you’re about to reap the rewards of your years of hard labor.  But, even if you haven’t got everything well planned, IT IS NOT TOO LATE!  Many of these principles are timeless.  In other words, implementing them can still benefit you.  You can’t lose!  But act now!  The Golden Years are just around the corner, and you can still have a great retirement, free from the care and worry that others have to put up with because they didn’t do their homework like you are now.  Good luck, God bless and have a great retirement!

Disclaimer:  Please note:  This article is believed to be based upon sound financial principles and is intended for informational purposes only.  Neither the author nor any other related persons and / or organizations are responsible or liable for the results of using this information. Furthermore, this article is not to be used as the basis for making individual financial decisions.  Please seek professional advice before making any important personal financial decisions.