Being in retirement is complicated, and planning for it can be a daunting task. At the heart of most retirement hardships lies the lack of preparation and proper planning.
But if you confront this inevitable life stage early on, with discipline, you will be well rewarded during the decades that you will be retired.
If you wait, it will be much harder, both financially and emotionally, to address all the required preparation that make up a sound retirement plan. Also, in most cases, waiting to plan will likely jeopardize your ability to outlast your retirement income resources. You need time and the miracle of compound interest enhancing your investments to build substantial resources.
Getting started on your planning, as soon as you become aware of the need to do so, will be a big advantage in creating a successful retirement lifestyle and retirement income structure. Here are 7 planning suggestions to help you move forward:
1. Start accumulating money, specifically earmarked for retirement, as soon as possible. Once started, continue to build your investment portfolio year by year. The ideal situation for a two-income household is to live off one income and save the second. Contribute to your 401(k), especially if your company provides a match, or create an IRA and a Roth IRA. If you have your own business research a Solo 401(k) or a SEP IRA. Be mindful of the contribution limits that apply to you when using these highly regulated deferred compensation plans. It is your responsibility to know and understand the IRS rules as they apply to your own contributions. Those rules can be found here.
In addition to the accumulation and investing of retirement money you will need to set up an emergency fund. This is something that is created slowly, over time, until you have at least six months to one year of basic living expenses saved as a cash emergency fund. This fund will need to last you throughout your retirement years, used strictly for dire emergencies.
2. Build a relationship with a good accountant/tax professional that understands IRS rulings for retirement money. Even if you choose to do your own taxes you need someone that is a tax professional that can check your numbers and advise you on changes or quirks in the tax law that could affect you favorably or unfavorably. As you get closer to retirement your accountant/tax professional will be most helpful in suggesting tax minimization strategies during your retirement years as well as keeping you abreast of any changes in retirement plan distribution rulings.
3. Never touch your retirement money, no matter what the perceived emergency might be. Over the years I have seen many botched retirement plans that came about by dipping into retirement savings; "but we really needed the money" is the most common reason given. If the money set aside and invested in your retirement accounts is for retirement, then the money is for your retirement and nothing else. You cannot replace the power of compound interest growing over decades. This is where proper planning and personal discipline will serve you well. Remember: Your retirement money is what will be there to support you for the 10 to 40 years you're retired and living without the benefit of earned income.
4. Do not use your accumulated retirement money as an ATM for your children, relatives or friends. I know a couple; I will call them Ricky and Lucy (not their real names), that are short over $700,000 dollars for their retirement. Ricky loved the attention and the admiration received from family members by being "the guy that gave everybody money." In all cases the money was supposed to be paid back, with interest and redeposited monthly into Ricky's retirement account. Was it? No. So the principal withdrawn, plus the loss of growth plus the tax consequences created by those withdrawals, generated well over $700,000 shortfall in Ricky and Lucy's retirement resources. Needless to say they will have to restructure their retirement lifestyle plans to accommodate their depleted nest egg.
5. Abolish all debt as soon as possible. For some people this will take months, maybe years. You cannot enter retirement with debt hanging over your head. Once you are debt free, and that includes your automobiles, then continue to save for ongoing future needs, such as new cars, replacement appliances, home maintenance, insurance deductibles and copayments.
6. Be mindful of where and how you are investing your money. Focus on managing risk. A helpful tool used for monitoring risk is known as a personal risk profile. Most likely your risk profile will change with your circumstances as the years pass. Some folks have a much higher risk profile during their 20s and 30s and 40s than in their 50s and 60s. This is individual. The actual investing process, along with a well-managed retirement portfolio, should actually be built around the management of risk rather than the chasing of returns.
7. Monitor your progress annually. Create your own annual review of your retirement plan. This habit will serve you well. Revisit everything from your beneficiary arrangements, to insurance policies, to the value of your growing retirement accounts. Make sure you are on track to meet your planning goals. Also, take a look each year at the progress you are making building your retirement emergency fund. It is much easier to tweak your efforts as you go and make adjustments year by year, when there is still plenty of time to correct and enhance your planning efforts, rather than wait until you are about to retire and suddenly find out all the changes that need to be made and the shortfalls that may occur.
Retirement planning, in its purest form, is actually a lifelong process. If you start soon enough you will have decades to learn, adjust and fine-tune what will be needed to meet your future living requirements. The goal here is this: to enter retirement with a sense of comfort and peace of mind that comes from knowing you have planned well.
Disclosure: Melody Juge is an Investment Advisor Representative specializing in retirement planning.