I was talking with a friend of mine about financial planning recently, and she somewhat sheepishly admitted that she and her spouse spend considerably more time planning for their vacations than they do for their retirement. Afterward I realized that planning for both has many similarities.
Everyone has a different ideal vacation destination. Some like the beach, some like the mountains, some like the city. It’s the same for retirement. Where you want to end up directly impacts how much you need to save before you stop working. Someone wanting to spend their retirement years living on their own private island is obviously going to require more money than someone who is happy to stay in the family home that is paid off.
But even if you’re planning a low-cost retirement, chances are you still aren’t saving enough. According to a recent survey by the Employment Benefit Research Institute (EBRI), a quarter of Americans have not even saved $1,000 for retirement, and 64% of us have less than $50,000 saved. EBRI estimates the current monthly social security payment to be $1,341. If you’re depending on Social Security to get you through, you’ll need to be incredibly frugal.
While you may be tempted to just hop in the car, start driving and see where the road takes you, it is not a recommended strategy if you want to safely reach your retirement destination. For one, you may not be able to recover from a wrong turn or an accident. Planning ahead is key and seizing opportunities while you are still working can have huge payoffs later. So what steps can you take now to ensure you make the most of your retirement years?
Map out your trip. For some, getting to vacation is half the fun. You may enjoy stopping and seeing attractions along the way, or going a bit out of the way to try a local restaurant you’ve read about in a magazine. Others just want to get there as soon as possible – hop on the nearest plane and take a cab from the airport directly to their destination. People approach their retirement in different ways too. It can either be the ultimate goal to be reached as soon as possible, or it can be the final stop in a lifetime of experiences along the way. With the latest financial planning tools, a qualified financial planner can help you create a retirement plan that combines your dreams with your financial resources.
Pack your bags. Saving right up until retirement will help you get to your financial destination safely. The time between raising kids and retirement (when your household expenses are typically lower but your earning power is still strong) can be a good opportunity to sock away some additional savings. If you are over 50 years old you can take advantage of catch-up retirement contributions. You can save an additional $6,000 per year to your 401(k) and an additional $1,000 to your IRA. Have your financial planner work in the additional savings to see how more dollars saved while you are working can enhance your lifestyle later.
Some delays are good. You are able to apply for Social Security benefits as early as age 62 and as late as age 70. You may be tempted to take your benefits as early as you can but delaying can really pay off. The longer you wait, the higher your benefit amount will be, and if you are healthy and anticipate a long life, the difference can be significant. Your benefit amount increases 8% per year from your full retirement age until age 70. Have your financial planner prepare a break-even analysis so you are fully aware of the tradeoffs of your filing options.
Keep on truckin’. The longer you work the longer you won’t need to tap into your retirement savings and the longer your investments have the opportunity to grow. Even part-time or occasional consulting work can make a difference. Your financial planner can show you the effects this supplemental income can have on your retirement lifestyle.
Fast lane or slow lane? Speed limits are in place to keep us safe, but many people are in such a hurry to get to their vacation fun, they push the limit. It may get them there faster, but it could also result in them being in an accident or getting pulled over. As an investor, you face the same dilemma. Investments with more volatility may get you to your financial goal sooner, but they are also riskier and may set you back more than they move you forward. Have your financial planner assess your risk tolerance so you are prepared for the possible ups and the downs of your investment strategy.
Whether you’ve traveled by jet or meandered your way in the family car, you’ve reached your destination. Now what? You can sit in the sand with your book or rent jet skis; you can eat your way through the city or take in every show or museum possible; you can climb mountains or just take in the view. Everyone enjoys their destination in different ways. Retirement is no different – you can enjoy your well-deserved time off relaxing on a porch swing or do all that world traveling that just wasn’t possible before.
There is no right or wrong way to retire, it’s all personal preference. But there is a right and wrong way to prepare for it, based on how you want to get there and what you want to do once you arrive. An experienced financial planner will take into account your retirement vision and help you put together a plan that will allow you to enjoy both your journey and your ultimate destination, wherever it may be.
Danya Karram, Principal