Retirement Tips and Misconceptions Christopher R. Wills, CPA, CFA, CFP® Director of Wealth Management
What does your retirement dream look like? It could be sipping coffee on the deck of a beach house in Cape Cod, or perhaps finally getting the opportunity to travel the world. Maybe it’s just living worry-free when it comes to money. The key to living that dream, however, is creating a plan to pay for it. And because we’re living longer, we can expect to spend more years in retirement than our parents and grandparents did. Yet unfortunately, too few of us have established financial security for those golden years.
According to the U.S. Department of Labor, less than half of Americans have calculated how much they need to save for retirement. What’s more, a recent national survey shows that over one-third of workers have less than $1,000 in savings and investments that could be used for retirement, not counting their primary residence or benefit plans such as pensions, with 60 percent of workers having less than $25,000. The picture isn’t much better for those who have already retired, with 29 percent having less than $1,000 in savings and investments, and 58 percent having less than $25,000.
Apart from what you put aside, the only other reliable income for retirees is Social Security. For the average worker, though, those benefits are only a little over $1,200 a month. And make no mistake, retirement is expensive – far more expensive than most of us realize. Experts estimate that you’ll need at least 70 percent of your pre-retirement income to maintain your standard of living once you stop working. However, our real world experience with clients shows that it is rarely below 90% and more often more than 100% of pre-retirement income.
Surprisingly, it’s high earners who more often miscalculate or don’t realize what it takes to be comfortable post-retirement. There’s a widely held view that $1 million is the ideal goal for retirement savings, and for many families, that’s certainly enough. But it’s nowhere near the amount needed for, say, spouses who now earn a combined annual salary of $300,000, who want to continue their current lifestyle. Translation: a $1 million nest egg means living on about $45,000 a year income from your portfolio. For folks who are used to much more, that number can be shocking. Without a larger portfolio, those people run the risk of either having to drastically downsize or depleting their retirement fund before they die. But don’t worry, it’s not too late to plan for the future. A Certified Financial Planner (CFP®) can help chart a course of action, and all you need to get there is discipline and commitment. Here are five tips to get started the right way:
Start saving now.
Twenty-somethings might think it’s too soon to worry about retirement, but it’s actually prime time to sock it away. Sure, the job market is still rough, and if you’ve scored a position, the salary probably isn’t huge. But don’t put this off by saying you’re young and poor – there are too many advantages to starting early. A little bit goes a long way: setting aside just $2,000 every year (only a little more than $150 a month) for 40 years will get you around $560,000, assuming 8 percent annual returns. Take advantage of all employee benefits, too. If your workplace has a traditional pension plan, check to see if you’re covered. If the company offers a retirement savings plan, such as a 401(k), sign up and put in as much as you can from every paycheck. Your taxes will be lower, and your employer may match a certain percentage of contributions. If you’re not eligible or such plans aren’t available, open a ROTH IRA and make automatic monthly deposits; the money can be withdrawn at retirement tax-free. And for those over 30, it’s never too late to put together a decent stockpile, although you may need to be more aggressive. The longer you wait to put together a portfolio, the more investment time and money slips away.
Save 20 percent of your net pay automatically.
That’s right, 20 percent. The rule of thumb was once 10 percent of your annual salary, but not anymore. We’re all living longer, healthier lives, so it’s best to be conservative and assume you’ll spend two — if not three — decades in retirement. This figure may seem daunting at first, but with a little effort, you’ll learn to live on what’s left over. The result is worth it: You’re setting up a smart fiscal habit that will last a lifetime. And the best way to create this habit is to have those savings deducted automatically from your paycheck and directly deposited in your retirement savings account.
Estimate your expenses.
Sharpen a pencil and take a hard look at your budget. Evaluate it by using the 50-30-20 rule, a guideline coined by Harvard bankruptcy expert Elizabeth Warren that divides after-tax pay into needs, wants and savings. Note the essential expenditures you “need” to make each month, including housing, transportation, utilities, groceries, insurance and tuition; the total amount you spend in this category should be no more than 50 percent of your take-home pay. Then 30 percent goes to discretionary spending, or “wants,” such as eating out, concerts or a trip to Vegas. As mentioned, the last 20 percent should go towards savings and debt reduction.
Moderate your lifestyle.
Trimming your budget won’t be fun, or easy, but you’ll likely be surprised by how much less you can live on. Does that mean you can’t enjoy a nice bottle of wine at a restaurant, or ever buy a new purse? Of course not – but you probably won’t be able to do that every month. Some simple cost cutting strategies also may help. Consider vacationing at home instead of going out of town. Drop the gym membership and start jogging around the neighborhood. Even small things like taking lunch to work or skipping the usual morning stop at Starbucks can save hundreds of dollars a year. And dump the “keeping up with the Joneses” mindset: Chances are, most friends and neighbors who seem to be living large now won’t be adequately prepared for retirement like you will. Those surveys don’t lie.
Make sure your retirement program offers growth and income.
The traditional way of looking at money management has been to put more into bonds as you get older. But from the standpoint of the current financial market, with interest rates at historic lows, the bond portion of a portfolio is yielding low single digits in terms of income. So if your plan is to withdraw 4 percent of savings a year, but your portfolio’s income is below 4 percent, that fund will be emptied in time. The best way to sustain you throughout retirement is by having a well-diversified, market index type of portfolio – but that’s only if you can handle seeing it go up and down in value. If the topsy-turvy stock market literally keeps you up at night, it may not be the best approach, even if it’s the right economic strategy. Bottom line: Figure out your risk tolerance, and balance your retirement fund in a way that makes you comfortable. You don’t have to plan this alone either; a Certified Financial Planner (CFP®) can help chart a course of action and recommend the best ways to achieve your goals. To learn more, please contact R.W. Rogé & Company and ask to speak to one of our financial advisors or visit our website at https://www.rwroge.com/.
Christopher R. Wills, CPA, CFA, CFP®