While there are many unknowns that can impact retirement plans along the course of a career, planning for retirement as soon as possible is the surest way to realize your retirement goals.
According to The Motley Fool, the average American retires at age 631. You’ll need approximately $1,060,751 in savings if you expect to draw $5,000 per month for 30 years, assuming 6% annual investment returns and 2% inflations. Of course, not everyone is intending to draw $5,000 a month. Depending on your retirement aspirations, you may need more or less savings.
To help you experience a financially sustainable retirement, we asked GW & Wade Principal Eric H. Rosenberg, JD, MBA for some advice. Rosenberg identified five key steps for investors to take in order to help you achieve your retirement goals.
Rarely will an individual experience an enjoyable retirement without a plan of what that retirement looks like now, says Rosenberg. He recommends asking yourself several questions as soon as possible in order to determine exactly how best and how much to save for retirement.
For Example:
Do you envision yourself traveling a lot, moving to another country, starting a business, volunteering or perhaps regularly babysitting your grandchildren?
To create a successful retirement plan, Rosenberg says that you must first determine how you see yourself spending your retirement years and what the associated costs will be to fulfill your vision.
There are two parts of a detailed cash flow analysis, says Rosenberg. The first part is your current financial situation. Specifically, how much income you’re currently earning and how much of it are you able to save.
Essentially, you’re summarizing your cash inflows and outflows. Inflows include salaries, freelance income, alimony, capital gains, dividends, investment income and so on. Outflows include personal fixed expenses such as mortgages and car payments, as well as your variable expenses such as utilities, groceries, entertainment and so on, says Rosenberg.
Investment research firm Morningstar put together a personal cash-flow statement which makes an excellent starting point in terms of evaluating your inflows and outflows2.
The second part of your cash flow analysis is forecasting what your retirement will cost you and how you’ll manage cash flow during retirement. According to U.S. News & World Report, six of the biggest retirement expenses you should be budgeting for include3:
Here is a handy retirement expenses worksheet4. As you can see, while the above six items may be the largest expenses you need to budget for in retirement, the worksheet provides a more comprehensive list.
When you enter retirement, your cash flow typically changes, says Rosenberg. For example, you may have income from pension distributions, Social Security, annuity payments, a part-time job, etc.
All of these types of income and expected retirement expenses can be forecasted by using financial modeling to help you understand exactly how much income you’ll actually have and will need when you’re retired, says Rosenberg. GW & Wade uses proprietary financial modeling software that accounts for an infinite amount of retirement assumptions.
For Example:
Let’s say that you want to retire at age 60, travel the world regularly, move to a smaller home near your children, and maintain your current ski condo. Your present financial picture includes: 50-years-old, $750,000 in savings, contributing $2,000 per month to your employer’s sponsored 401(k) account and an additional $500 per month to an Individual Retirement Account (IRA) for the next 10 years.
Modeling the above scenario will provide you with well-rounded retirement cost forecasting. You can alter any element to see the impact on your retirement costs and needed savings to achieve your retirement goals. This also includes changes in your lifestyle. For example, if you were to divorce, or send your child to a four-year in-state college rather than a private university, and so on.
Social Security Retirement Income Impact
For many individuals and couples, one of the biggest financial impacts on your retirement income is Social Security. Therefore, deciding when and how to draw upon your Social Security benefits is an important decision. In fact, there are irreversible penalties associated with filing for benefits too early, as well as reductions associated with receiving continued work income post filing, says Rosenberg.
Once you’ve determined your long-term retirement goals and have a clear picture of how much you’ll be able to save each month, meeting your retirement costs then requires a two-prong asset allocation strategy. Specifically, how much return on investment do you need and how should you structure your portfolio to obtain your needed return?
“If you set conservative goals, don’t over promise how much you’re willing to save and live a modest lifestyle today, this approach usually allows you to take less investment risk,” said Rosenberg. “However, if you haven’t been saving, then individuals are often forced into more aggressive investment options in order to meet their retirement goals. Said a different way, the more money you need, the more you’ll have to put your assets at risk.”
When thinking through your asset management allocations, it’s important to include portfolio rebalancing and tax planning in your decision-making, says Rosenberg.
The best way to save for retirement is to automate all of your savings, says Rosenberg. For example, if you’ve determined that you’ll save 15% of your gross income toward retirement, this money should be automatically deposited into your retirement accounts, such as your company-sponsored 401(k) or 403(b).
In fact, Rosenberg recommends contributing as much as you possibly can to any company-sponsored retirement accounts, beyond what your employer matches, as well as contributing to a second retirement savings account, such as an IRA.
“The reason why automating your retirement savings is so important is because it removes any monthly or other spontaneous decision-making,” says Rosenberg. “If a portion of your paycheck is automatically deducted for your 401(k) or additional savings is automatically transferred from your checking account each month to an IRA, then there is no surplus of money tempting you to spend. Instead, it’s all saved for your future and in a highly-organized fashion.”
8 Lifestyle Areas Where Additional Savings Lurk:
Rosenberg says that rarely does trying to defer all gratification until retirement work. Instead, it’s important to set up reasonable spending and saving targets to live within now. He uses a simple analogy to explain why over saving doesn’t work for most people, even if you’re behind on your retirement savings.
“If you’re dieting and you’re told that you can never have a cheeseburger again, there’s a likely chance you’ll run right out and buy one,” says Rosenberg. “The same is true for retirement saving. While I don’t believe you can ever save too much, there is a point at which, if you try to decrease your spending too much in order to catch up on retirement savings, you’ll end up miserable and repeatedly fall off your retirement savings plan. Instead, you need to find a balance of what will make you happy today and much later on in life,” said Rosenberg.
In Closing
For many individuals, the idea of achieving a financially sustainable retirement can often seem out of reach. However, at GW & Wade, we believe strongly that almost any financial goal can be met, but not without a personalized financial plan. A plan that encompasses each element of your life, beyond retirement planning, such as estate planning, risk management, charitable giving strategies and much more.
If you have questions regarding your financial future, we encourage you to contact us. Our expertise includes working with you to align your financial plan and investments, helping to ensure that you get to where you want to go.
Laurie W. Gerber, Client Development
GW & Wade, LLC
The information provided above is general in nature and is not intended to represent specific investment or professional advice. No client or prospective client should assume that the above information serves as the receipt of, or a substitute for, personalized individual advice from GW & Wade, LLC, which can only be provided through a formal advisory relationship. Clients of the firm who have specific questions should contact their GW & Wade Counselor. All other inquiries, including a potential advisory relationship with GW & Wade, should be directed to Laurie Gerber.
1 https://www.fool.com/retirement/general/2016/01/26/20-retirement-stats-that-will-blow-you-away.aspx
2 http://www.morningstar.com/finance/PDF/PersonalCash-FlowStatement.pdf
3 http://money.usnews.com/money/blogs/on-retirement/2015/08/31/take-control-of-your-6-biggest-retirement-expenses
4 https://personal.vanguard.com/us/insights/retirement/tool/retirement-expense-worksheet
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