by Michael Vandenburg, CFP®
The importance of planning for retirement should be obvious to everyone. If you’ve never given it much thought, here are a few reasons that make it imperative that you take control of your own destiny.
First, it was the combined whammy of the tech meltdown and the post-9/11 recession that battered our 401(k)’s and IRA’s. Next was inflation in health care and education costs that further diverted indebted consumers from concentrating on retirement. Now come the headlines that any company facing tough times – or intense shareholder pressure – can pull the rug out from under its retirees hoping for the traditional three-legged stool of retirement – pension, Social Security and savings.
All three legs are in trouble – we aren’t saving enough, Social Security is under attack and traditional pensions are disappearing – fast.
For retirees facing a sudden loss of pensions and benefits, there are really very few options except going back to work or turning home equity into a personal bank. So the time to start taking on the lion’s share of your retirement responsibility is now, whether you’re five, 10, or 20 years away from retiring.
One general tip that I think is important is personal accountability for your own outcome. Don’t count on anyone to take care of your retirement except yourself. The more funds you have in your own name instead of a corporate or government pension, the better. I’m not saying that social security will be gone soon or that your company’s pension will default when you retire, but don’t think for a second that they will take personal accountability to make sure you’re comfortable when you retire. If there is one good thing you can take from Generation X, it’s that they don’t expect anything from the government to help them with retirement.
Here are some things you need to consider:
What does “retirement” mean to you? Does it mean you golf every day or travel around the globe non-stop…I doubt it. It’s arguable that traditional retirement is going to be dead for many of us. For a lot of people retirement means getting to do the work they’ve always dreamed of, but never had the time for. For others it may be slowing down to only working a few days a week or a few hours a day. There are very few people, wealthy or not, that tell me when they retire they just want to relax.
Do a retirement spending dress rehearsal: In the last few years before retirement, see how much you can live like you’re already retired. Don’t automatically assume that retirement means living on less than you currently need. Take the time to examine where and how you spend your money. Looking back on how you spend will give you a much better idea about what you really need than trying to limit your spending in certain areas.
Get in shape — physically: It may be strange to hear health advice tied to your financial well-being, but it should be one of the first things you consider. That’s because the numbers on a bathroom scale, blood pressure monitor or cholesterol report can dramatically affect the cost of your healthcare and insurance premiums going into retirement. You’ll find that pre-existing conditions can boost your premiums – or possibly deny you coverage. That’s a very ugly surprise going into the years when you’re going to need healthcare coverage the most.
Consider a career shift: It may be a bit extreme to switch careers just because a particular employer has better benefits and savings options. But if the job appeals to you and you can make a move without endangering what you’ve already accrued, why not consider it?
Use your catch-up options: Various IRA and 401(k) options allow you to make additional contributions over standard savings limits above the age of 50. Make sure you know what those additional amounts are and take full advantage of them. It may only add an extra $1000 in savings per year, but if that money can grow tax-free like it does in a Roth IRA, the savings will add up over time.
Do an investment inventory: In a 30-to-40-year career, an individual may have gathered bits and pieces of pension benefits and personal savings and investments along the way. Likewise, there might be insurance policies, savings bonds and other small investments that may have slipped your attention. A re-evaluation of retirement options should begin with a full accounting and reorganizing of all investment and savings assets, preferably in an organized outline that’s easy for you and your adviser to access.
Don’t forget the i-word…inflation, not iPod: Inflation is at the top of the list for our current fed chairman, Ben Bernanke, and I think it should also be at the top of yours. You need to have a plan for how your income will keep up with inflation. The best way to plan for inflation is to hedge your portfolio with equities…the only asset class that has consistently beat inflation over the long-term. If you need $100,000 a year to live today you will need $135,000 per year in ten years just to keep up with inflation at 3%. If inflation were to creep up to 4.5%, you would need $155,000 after ten years. I don’t think we will ever go back to the hyper-inflation we saw in the ‘80s, but as you can see, it doesn’t take much to make a big difference.
If there is one theme you are getting from this, I hope that it is retirement is different for everyone and only you know what is best for you and you are the only one responsible for making sure you achieve it. b