Planning for Retirement

So, you want to plan for your retirement. Great idea, but what does that involve? Well, it depends on your age and what you’ve done so far for retirement, as well as how much detail you want to get into.

If you’re in your 20’s or 30’s, the main thing you can do is simply to save. The earlier you start, the less you’ll have to put away in the long run. This is because of the amazing effect of compounding. For example, if you invest $1 at age 20, it will be worth $21 when you’re 65, assuming you earn an average of 7%, which is about the historical rate of return on U.S. stocks.

Millennials tend to be wary of the stock market since they grew up during the Great Recession, but if you want to keep up with inflation, stocks are clearly the best way to invest.

How much should you save? The normal advice is 15% of your income.That can be hard to do when you’re young and not earning a lot, so start with a realistic goal of 3-5% and increase that with time. If your company matches your 401(k) contributions, you should certainly contribute up to the maximum that they will match, since that’s free money.

Don’t forget that over time, stocks will greatly outperform bonds and cash. Millennials tend to be wary of the stock market since they grew up during the Great Recession, but if you want to keep up with inflation, stocks are clearly the best way to invest.

In your 40’s, your goal should be to increase your savings rate and to diversify your investments. If you don’t have a 401(k) available through work, you need to set up a monthly contribution to an IRA from your bank account. If you leave it to chance and just contribute when you think you can afford it, it’s unlikely you’ll save enough. Try to save a minimum of 10% of your income. Human nature is that if the money’s not there, we tend to adjust. And since there are tax advantages in saving for retirement, your 10% in contributions will only cost you around 7% in take-home pay.

At this point, you want to start adding bonds to your portfolio. Bonds add stability in down markets, smoothing out your investment “ride”. A rule of thumb would be to have somewhere between 20-40% of your portfolio invested in bonds, depending on your tolerance for risk.

In your 50’s, you suddenly realize that retirement is not off in the distant future any longer, it’s staring you in the face. This is the time to start forecasting how it’s all going to shake out. Pick a retirement age and do a cash flow forecast. Far better to find out now if you’re going to come up short, then when you’re 75 and faced with eating Little Friskies for dinner. Here are two good online do-it-yourself forecasting programs: Financial Mentor Ultimate Retirement Calculator, and Flexible Retirement Planner.

When you reach your late 50’s or early 60’s, you need to add more detail to your planning. Look at any company pensions you might have. Think about when to take Social Security. One tool to look it is: http://socialsecuritysolutions.com/ . Seriously consider waiting past 62 to start. Do a detailed budget plan to get a realistic idea of how much income you’ll need. Ratchet back your stock allocation a bit (but not too much—you still need to keep up with inflation.) Look into long-term care insurance. Get your estate plan in order (see last month’s blog entry). Think about housing, since this is the biggest expense in retirement. And consider how you’re actually going to draw money out of your investments in ways that minimize taxes.

Finally, before you make the big decision to retire, see a good financial advisor. I recommend a “fee-only” CERTIFIED FINANCIAL PLANNER™ professional. Having an experienced financial planner review your entire situation will be well worth the investment, especially considering that you may be retired for thirty years or more.

So, enjoy your pre-retirement years but remember that a little retirement planning can make a big difference when you’re older. That is, unless you actually like Little Friskies.

*Note: If you live in the Southern Oregon/Northern California, you may want to look into classes I teach at Southern Oregon University’s Osher Lifelong Learning Institute. The classes cover all aspects of retirement planning and are suitable for both recent retirees as well as pre-retirees.