Many people resist retirement planning because they don’t know where to start, and can be intimidated by the process. They end up procrastinating which can make their desired outcome more difficult to reach. While the entire process can feel intimidating, there is no reason to try to eat the whole retirement planning pie all at once. By seeking the guidance of a trusted financial advisor, who can help you slice it into smaller pieces, it’s much easier to digest, and hopefully you won’t get that awful feeling of never wanting to eat that pie again.
Overall, we find it’s easier to plan for retirement if you think of your retirement plan as three distinct stages, focusing on the knowledge, resources, and mindset needed for each one. Rather than aiming for some distant target likely to change over time, you can establish more meaningful benchmarks with shorter timelines. By planning for retirement in stages, you can set more achievable goals and gain confidence and motivation with more frequent accomplishments.
I. Stage One (30s and 40s): Accumulation
Set Realistic Retirement Goals
Generally, people without clearly defined objectives can lack the confidence to adhere to a long-term strategy. Numerous surveys point to the low percentage of working adults who have yet to establish a clearly defined retirement goal. According to one study, more than half have yet to determine what their essential living expenses in retirement would be. As a result, nearly half were uncertain about how to invest their money to maximize their retirement income.
Establish a Long-Term Investment Strategy You Can Follow
As you accumulate assets in your retirement accounts, it’s time to develop a serious long-term investment strategy that you can follow. The key to successful long-term investing is to formulate a strategy around sound investment principles and practices and have the discipline and the patience not to break the strategy.
We feel that when working with a financial advisor, investors are less likely to succumb to the emotions of greed or fear, which causes them to act in ways that counter their long-term needs. It must start with clearly defined goals with a specific time horizon, so you can determine how much you need to invest, the rate of return required on your investment, and how much risk you will need to take to achieve that return.
II. Stage Two (50s and 60s): Preparing for Retirement
Retirement Income Planning Requires Realistic Spending Assumptions
For many years, financial planners have advocated general rules of thumb, such as the “70 percent rule” for calculating how much income you will need in retirement. The rule suggests that you will need to replace just 70 percent of your pre-retirement income to provide for your living needs in retirement.
However, we live in a different world today, and rules based on conditions that existed four decades ago don’t reflect the actual costs of aging today. While general rules may be suitable for some people, the risk of inflation, which is heightened by longevity risk for today’s retirees, requires individualized planning based on current realities.
Critical Steps to Take on the Glidepath to Retirement
Track your expenses now. By tracking your expenses now, you can steadily adjust your spending to smooth out your transition into retirement.
Start living like a retiree now. You can take it one step further by making lifestyle changes now based on how you want to live in retirement. That could include moving into a less expensive home or location, downsizing your cars, and embracing a more frugal lifestyle.
Increase your savings. By taking the first two steps, you can free up more cash flow that can be applied to your retirement savings. Within 15 years of retirement, you should aim to save at least 20 percent of your income.
Don’t invest too conservatively. With inflation and longevity to consider, it may be essential to maintain sufficient exposure to equities to ensure you don’t outlive your assets. Working with your advisor to develop a well-diversified portfolio of equity and fixed-income investments can provide you an opportunity to achieve the capital growth you’ll need while reducing portfolio volatility over the long run.
III. Stage Three (60s 70s): Retire!
Gather Your Retirement Income Sources
Social security benefits: You have more options for receiving your Social Security benefits than you know. Depending on your circumstances, several dozen options or combination of options are available. Making the wrong choice could cost you significant money over your lifetime. We feel that it is essential to seek the guidance of a financial professional with extensive knowledge of Social Security.
Pension income: Within six months of retirement, you should meet with your pension plan administrator to explore your options.
401k distributions: As part of your income planning, you need to fully explore the tax implications of your retirement plan withdrawals. Depending on your circumstances, it may be better to delay the taxable withdrawals from your 401k plan. Still, you must also be mindful of the Required Minimum Distribution (RMD) rule to avoid additional taxes and penalties. Working with an experienced retirement income advisor can help you determine your best course.
IRA distributions: Taxation of IRA distributions depends on the type. For traditional IRAs, the withdrawals are fully taxable. For Roth IRAs, the withdrawals are not taxable if they meet the withdrawal requirements (first withdrawal made five years after the first contribution and after age 59 ½).
Non-qualified investments: Investments made outside of a qualified plan generally yield taxable income. However, long-term investments are taxed at the more favorable capital gains tax rate. Working with a retirement income advisor, you need to determine whether it makes sense to access these investments before you access your qualified plans.
It’s Never too Early to Get Started
Retirement planning today has taken on many new dimensions that never had to be considered by earlier generations – we’re living longer; the cost of retirement is increasing; we must rely on our own capital to provide lifetime sufficiency – which requires more time, effort and knowledge to prepare for retirement.
Working with a financial advisor on a staged approach to formulating and implementing your retirement plan can help you to acquire the requisite knowledge in more manageable pieces so you can be in control of your financial future at each stage of the process.
Join Our Destination Retirement Course Today
This is just one example of the many topics we cover in our two-part, interactive retirement planning course, Destination Retirement. Erik and Julia Lembcke are Certified Financial Planner ™ (CFP®) Professionals who specialize in retirement planning. Our course covers everything you need to be aware of including Medicare, Social Security, income planning, retirement accounts, taxes, investments, estate planning documents, long-term care, and many other important retirement topics.
Visit www.URSLearn.com to learn more about Destination Retirement, taught from 6:00 pm to 9:00 pm over two nights:
- Course Code 1URS2023 – Tuesday, January 24th & 31st Palm Beach State College (Loxahatchee Campus)
- Course Code 2URS2023 – Wednesday, January 25th & February 1st Nova SE University (Palm Beach Gardens Campus)
- Course Code 3URS2023 – Thursday, January 26th & February 2nd – Indian River State College (Salerno Campus, Stuart)
And of course, feel free to share our course with anyone else you think may benefit. We hope you can join us and look forward to meeting you.