What is your dream of retirement? Travel in the world? Moving to Arizona? Become a migrating snowbird? Improve your golf game? Open a part-time consulting business? Spoil your grandchildren?
Whether retirement is decades away or upon us, it is difficult for many retirement investors to determine if retirement dreams are actually achievable goals. But now is not the time to put your head in the sand because retirement is approaching.
Take control and take action. Determine which dreams might be achievable goals and create a strategy to make them come true.
Here are seven considerations to help you get organized:
Goals. With your dreams in mind, set your goals. Be as realistic as possible during this step, but you will have the flexibility to adjust your goals in step five. In doing so, answer the following questions: At what age would you like to retire? Where would you like to live in your retirement? What hobbies and travel plans would you like to have? Do you want to be able to help your children and / or your family during your retirement years?
Needs. Calculate how much money you will need. A lot of people approach this in terms of income replacement: what percentage of your current income will you need each month in retirement? Create a breakdown of your current budget expenses and decide which expenses will continue into retirement. Also take new expenses into account. Points to consider: Will you have a mortgage loan paid off? Will you have a car? Will insurance premiums and fuel consumption change during retirement? Could you sell your car and use public transport? During this time, no one wants to think about dying, but it is important to plan well so that you don’t outlive your money. Unless you have specific knowledge of a health issue that is sure to take your life off, plan your retirement finances like you will live a very, very long time.
Investments. There are many calculators online designed to help you create an appropriate asset class allocation. A good calculator will take into account your time frame until retirement, your risk tolerance and your personal biases. Armed with a percentage breakdown of asset classes that are right for you, you’ll be able to research the investment options in your pension plan to determine how to allocate your investments. If this process seems overwhelming, consider seeking professional 401 (k) investment advice through a personalized investment-focused service.
Savings. Calculate how much money you need to set aside each month to meet your retirement goals. Consider the following: How aggressively do you plan to invest? A more aggressive allocation has the potential to generate higher returns; However, keep in mind that there is further downside potential as well. Will you have income from part-time work or any other source beyond your IRA and employer-sponsored retirement plans? Are you going to inherit the money? If this step confuses you, there are calculators online that can help. Again, this is an area where good investment advisory services shine.
Adjustments. If the retirement of your dreams is financially impossible given your current lifestyle, something has to give. Either adjust your savings rate based on your retirement goals or adjust your expectations based on your savings rate. If you can make budget cuts today that allow you to put more money into a retirement account, you will reap the rewards in retirement.
Regular reviews. Have a plan in place to assess your progress and increase your retirement savings rate each year. Literally create a recurring calendar reminder and set aside an afternoon each year to spend preparing for retirement.
Big picture. Organize all your finances. Make your current budget work for you. Consider using Mint.com, iBank, or a similar service to track your spending habits. Also consider taking out long-term care insurance. Health insurance does not generally cover extended stays in care facilities or continued home assistance, even if medically necessary. Long-term care insurance could save you millions of dollars in retirement. Likewise, study disability insurance, which would allow you to avoid using your retirement savings if an illness or injury prevents you from working. Finally, leave a legacy with life insurance rather than your retirement savings. This will allow you to use your retirement savings to achieve your goals without feeling guilty about your heirs.
People who know what they’re doing won’t tell you that planning for retirement is easy. It takes time, research and discipline. Rather than focusing on the expense, I suggest you focus on the reward. Approach retirement planning with the same joy you have in vacation planning, because retirement could be the longest and most fun vacation of your life.
Scott Holsopple is the President and CEO of Smart401k, providing easy-to-use, cost-effective 401 (k) advice and solutions for the everyday investor. His advice has appeared in various news organizations including FOX Business, USA Today and The Wall Street Journal. Keep an eye out for Scott on Twitter and Facebook.