by Paul Merriman
At some point, every investor who is planning to retire must confront his or her financial future. For most people, basic retirement planning can be distilled into 10 numbers.
As I worked with thousands of people over the years, and I saw over and over that when these numbers come into focus, the future starts looking clearer and less mysterious.
As you work to nail down these numbers, I suggest you regard the process as an exercise in discovery. Some items are easy to determine, while others may require some digging and careful thought. I think you will do a much better job if you use a competent financial adviser to help you get the right numbers and see what they mean for you.
One: Your current cost of living. This is the foundation of everything that follows. You could go into great detail on this, but a quick-and-dirty approach may be enough to get the process started: Identify your current gross income and subtract whatever you are saving for the future, including contributions to any IRA and employee retirement accounts. That's your cost of living, including taxes.
Two: The rate of future inflation. You will have to estimate this, of course. We all know that $100 isn't what it used to be, and inflation isn't likely to go away. Since 1926, inflation has been 3%. Over the years, that can do much more damage to your finances than you might think.
Three: The number of years before you will retire. This isn't as simple as it seems. We can't always control when we stop working. And baby boomers increasingly retire in stages. But getting a useful financial snapshot requires a number here. So for this exercise, choose a future date when you want to be financially ready to leave the workforce "cold turkey."
Four: Your inflation-adjusted cost of living in your first year of retirement. While you can crunch the number yourself with a financial calculator, this item can have lots of moving parts.
How will your taxes change? Will you spend more money on travel and hobbies? Less on commuting and clothes but more on health care? Will you move in search of lower housing costs, a better climate or to be closer to your kids? I suggest you use an adviser to help make sure you have not overlooked something important.
Five: The noninvestment retirement income you can count on. Probably this will include Social Security. It might also include a pension or rental income. Don't include interest, dividends and capital gains; they come into play next.
Six: The retirement income you will need from your portfolio. If you have the first five answers, this one requires only simple math. You know how much you'll need in that first year of retirement, and you know how much you can count on. The difference must come from somewhere else, most likely your portfolio.
Seven: The size of the portfolio you'll need when you retire. If your investments are properly balanced between well-diversified stock funds and low-cost bond funds, you should be able to withdraw 4% of your portfolio annually without much risk of running out of money.
Multiply the result you obtained in the previous step by 25. That's how big your portfolio should be on Day 1 of retirement. If this number seems impossibly large, don't panic. There are lots of things you can do about it.
Eight: The current size of your portfolio, excluding real estate and other nonliquid assets. For most pre-retirees, this number will be less than what you will need when you retire. The next items will help you build it up.
Nine: The amount you're saving for retirement every year. You should already know this from the very first calculation. If your annual savings plus your present portfolio will equal the result from Item seven, then you're in fine shape. More likely, these savings alone won't be enough. That's why you need some growth in your portfolio.
Ten: The annual return you need from now until you retire. While you can make this computation with a financial calculator, I suggest you discuss this point with an adviser to make sure you have reached a reasonable result.
The point of this exercise is to get a snapshot of your retirement readiness. I found an online calculator that, while it doesn't cover all the information I have described, will give you a quick idea of whether or not you are on the right track.
Several times I have recommended using a financial adviser to help you through these calculations, and you can do that without establishing a long-term relationship. You can hire one by the hour to check your work and make sure you have an action plan to get you where you want to go.
If you do that, these 10 numbers can change your life.
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Tuesday, January 8, 2013
Friday, January 4, 2013
Four Retirement Planning Steps for Gen X, Yers
by Steve Vernon
If you're a member of Gen X or Gen Y, why not get 2013 started on the right track by taking steps to improve the odds that you'll be able to enjoy your retirement years without the stress of worrying about your finances? It's never too early to start planning for a long and prosperous life. But don't try to do everything at once -- you're more likely to succeed by taking just one step at a time. So act on one of these ideas each month, and before half the year has passed you'll be well on your way to financial freedom in your later years.
Step 1: Find ways to spend less money.
The No. 1 reason most people give to explain why they can't save any money is that they spend their whole paycheck -- and then some -- in order to afford all the things they need or want now. Instead of that line of thinking, why not think of it this way: You can buy yourself freedom from work in your later years if you're careful about how you spend your money today. Because if you spend all your wages now, you'll become a slave to work for the rest of your life.
Over the years, I've found many ways to save significant sums of money, including driving my cars into the ground instead of buying a new one before the old one's dead; not buying the latest electronic gizmo and making do with older versions that work perfectly well; and not taking expensive vacations. And in spite of cutting back, I've had a great life!
You can also be careful about how much money you set aside for your children's college education. Will it really ruin their lives if they go to a good public school instead of an expensive private one? Keep in mind that if you sacrifice your retirement savings to pay for your kids' college tuition, the "gift" you might end up giving them is the need to move in with them in your later years.
Step 2: Make changes to improve your health.
There are simple things you can do now to significantly reduce the odds of developing expensive and debilitating illnesses at any age. And the sooner you get started, the better. Many readers may have innovative wellness programs at work that make it easy and rewarding to make progress. Improving your health doesn't need to cost anything -- all it takes is determination. And another great benefit is that you'll look and feel better right now and won't need to wait for your retirement years for the payoff.
One simple step to take is to reduce the amount of fatty foods you eat and to increase the amount of fruits, vegetables and grains you consume. The bonus? Cutting out meat and consuming more fresh fruits, vegetables and grains should save you money at the grocery store, since these foods usually cost less than meat. This will allow you to save more for retirement, so you'll be achieving two goals for the price of one.
Most people would also benefit by increasing the amount of exercise they get every day. If you're a couch potato but want to be more active, try starting with a brisk, 30- to 45-minute walk around your neighborhood, either first thing in the morning or right after dinner. Take your spouse or partner, too, if you have one, or call up a friend who's interested in exercising. And if you're already exercising, good for you! But I bet you can find ways to improve your workouts by making sure you get all the kinds of exercises (stretching, cardio, strength training and balance) that are necessary to keep you fit in your later years.
Step 3: Invest in your career.
You won't be able to invest much for retirement if you don't have a job that pays well. If you're in a dead-end job, maybe it's time to investigate what type of training or education you need to start a career with more of a future. Or if you're in a good career already, think about the steps you can take that will make you more valuable, and thus more likely to be earn raises and promotions. It might not even cost you anything; maybe it just involves signing up for more training offered by your employer or taking on new responsibilities.
Think you've been doing well at work but haven't received a raise lately? Consider asking for one, but do your homework first. If you're successful and convince your boss you deserve a raise, invest the amount of your raise in your 401(k).
Step 4: Increase your retirement savings.
Yeah, yeah, I know you've heard over and over that you should start saving for retirement when you're young. Well, you're going to hear it again!
If you participate in a 401(k) at work, bump up your savings by just 1 or 2 percent of your pay. Or if your plan has an "auto-escalation" feature that periodically increases your contribution, sign up for it. Saving a little more now won't ruin your life -- you likely won't even miss the money -- and you'll learn how to get by while spending less (see Step 1 above). Better yet, make sure you're saving enough money. (The posts below offer some guidelines for determining how much money to set aside for retirement and for motivating yourself to meet your savings goals.)
If you take charge now, you'll feel much better about your future! And there's no better way to get started than by taking these steps during the first half of 2013.
READ MORE
If you're like many people in their 20's and 30's, you've put off thinking about retirement because it seems so far away. And while some Gen X and Gen Yers have started worrying about being prepared for retirement, they aren't yet following through on solutions.
Maybe it's time to get serious.
When I give retirement planning workshops to baby boomers, audience members often express one of these two thoughts:
Maybe it's time to get serious.
When I give retirement planning workshops to baby boomers, audience members often express one of these two thoughts:
- I wish I'd heard you 20 years ago
- My kids need to hear your message
If you're a member of Gen X or Gen Y, why not get 2013 started on the right track by taking steps to improve the odds that you'll be able to enjoy your retirement years without the stress of worrying about your finances? It's never too early to start planning for a long and prosperous life. But don't try to do everything at once -- you're more likely to succeed by taking just one step at a time. So act on one of these ideas each month, and before half the year has passed you'll be well on your way to financial freedom in your later years.
Step 1: Find ways to spend less money.
The No. 1 reason most people give to explain why they can't save any money is that they spend their whole paycheck -- and then some -- in order to afford all the things they need or want now. Instead of that line of thinking, why not think of it this way: You can buy yourself freedom from work in your later years if you're careful about how you spend your money today. Because if you spend all your wages now, you'll become a slave to work for the rest of your life.
Over the years, I've found many ways to save significant sums of money, including driving my cars into the ground instead of buying a new one before the old one's dead; not buying the latest electronic gizmo and making do with older versions that work perfectly well; and not taking expensive vacations. And in spite of cutting back, I've had a great life!
You can also be careful about how much money you set aside for your children's college education. Will it really ruin their lives if they go to a good public school instead of an expensive private one? Keep in mind that if you sacrifice your retirement savings to pay for your kids' college tuition, the "gift" you might end up giving them is the need to move in with them in your later years.
Step 2: Make changes to improve your health.
There are simple things you can do now to significantly reduce the odds of developing expensive and debilitating illnesses at any age. And the sooner you get started, the better. Many readers may have innovative wellness programs at work that make it easy and rewarding to make progress. Improving your health doesn't need to cost anything -- all it takes is determination. And another great benefit is that you'll look and feel better right now and won't need to wait for your retirement years for the payoff.
One simple step to take is to reduce the amount of fatty foods you eat and to increase the amount of fruits, vegetables and grains you consume. The bonus? Cutting out meat and consuming more fresh fruits, vegetables and grains should save you money at the grocery store, since these foods usually cost less than meat. This will allow you to save more for retirement, so you'll be achieving two goals for the price of one.
Most people would also benefit by increasing the amount of exercise they get every day. If you're a couch potato but want to be more active, try starting with a brisk, 30- to 45-minute walk around your neighborhood, either first thing in the morning or right after dinner. Take your spouse or partner, too, if you have one, or call up a friend who's interested in exercising. And if you're already exercising, good for you! But I bet you can find ways to improve your workouts by making sure you get all the kinds of exercises (stretching, cardio, strength training and balance) that are necessary to keep you fit in your later years.
Step 3: Invest in your career.
You won't be able to invest much for retirement if you don't have a job that pays well. If you're in a dead-end job, maybe it's time to investigate what type of training or education you need to start a career with more of a future. Or if you're in a good career already, think about the steps you can take that will make you more valuable, and thus more likely to be earn raises and promotions. It might not even cost you anything; maybe it just involves signing up for more training offered by your employer or taking on new responsibilities.
Think you've been doing well at work but haven't received a raise lately? Consider asking for one, but do your homework first. If you're successful and convince your boss you deserve a raise, invest the amount of your raise in your 401(k).
Step 4: Increase your retirement savings.
Yeah, yeah, I know you've heard over and over that you should start saving for retirement when you're young. Well, you're going to hear it again!
If you participate in a 401(k) at work, bump up your savings by just 1 or 2 percent of your pay. Or if your plan has an "auto-escalation" feature that periodically increases your contribution, sign up for it. Saving a little more now won't ruin your life -- you likely won't even miss the money -- and you'll learn how to get by while spending less (see Step 1 above). Better yet, make sure you're saving enough money. (The posts below offer some guidelines for determining how much money to set aside for retirement and for motivating yourself to meet your savings goals.)
If you take charge now, you'll feel much better about your future! And there's no better way to get started than by taking these steps during the first half of 2013.
READ MORE
Tuesday, January 1, 2013
Seven Tips for People Who Will Retire in 2013
by Emily Brandon
The oldest baby boomers will turn 67 in 2013. Many of these boomers have already retired, while others may be contemplating taking the plunge next year. Here are some tips for those planning to retire in 2013:
Make sure you are vested in your retirement benefits. While you always get to keep the money you contribute to your workplace retirement account, you don't necessarily get to keep your employer's contributions until you are vested in the retirement plan. Some retirement accounts don't allow you to keep any employer contributions until you have been with the company for a specific number of years, while others allow you to keep a proportion of your benefit based on your years of service. Find out the date upon which you can keep all of your benefits, especially if you have only been with your current employer for a few years. In some cases, it can be worth it to stick around for a few extra weeks or months to get a bigger retirement payout.
The oldest baby boomers will turn 67 in 2013. Many of these boomers have already retired, while others may be contemplating taking the plunge next year. Here are some tips for those planning to retire in 2013:
Make sure you are vested in your retirement benefits. While you always get to keep the money you contribute to your workplace retirement account, you don't necessarily get to keep your employer's contributions until you are vested in the retirement plan. Some retirement accounts don't allow you to keep any employer contributions until you have been with the company for a specific number of years, while others allow you to keep a proportion of your benefit based on your years of service. Find out the date upon which you can keep all of your benefits, especially if you have only been with your current employer for a few years. In some cases, it can be worth it to stick around for a few extra weeks or months to get a bigger retirement payout.
Decide when to claim Social Security. Social Security statements became available online for the first time in 2012, and more than 1 million people have already downloaded them. Check your statement to make sure your earnings were accurately posted to your Social Security record, and make note of how much you will receive from Social Security at various dates. Most baby boomers can claim the full amount of Social Security they have earned beginning at age 66. Boomers who sign up before age 66 will get a reduced payout. Retirees can further boost their monthly payments by delaying claiming up until age 70. You don't have to sign up for Social Security in the year you officially retire. "You have some folks who, by default because they are going to retire, decide to take Social Security, and that's not always the smartest decision," says Robert Oliver, a certified financial planner for Oliver Financial Planning in Ann Arbor, Mich. "You get delayed retirement credits the longer you wait between ages 62 and 70. For most people, it makes sense to wait."
Sign up for Medicare on time. You can first sign up for Medicare beginning three months before the month you turn 65. This initial enrollment period lasts until three months after age 65. If you don't sign up during this seven-month window around your 65th birthday, your monthly premiums will increase by 10 percent for each 12-month period you were eligible for, but did not enroll in, Medicare Part B. If you are covered by a group health plan based on your or your spouse's current employment after age 65, you need to sign up within eight months of leaving the job or health plan to avoid the penalty. For people who retire before age 65, you need a plan to maintain health coverage until you become eligible for Medicare, such as through COBRA continuation coverage or a spouse's health plan. "People really need to think about the cost of health insurance, especially if they are retiring from a company that has paid all their premiums," says Connie Brezik, a certified financial planner for Asset Strategies, Inc., in Casper, Wyo., and Scottsdale, Ariz. "They might not realize how big a part of their budget that is going to be."
Protect your savings. If you haven't done so already, you need to shift your primary investment strategy from growing your wealth to protecting what you have. "As you get closer to retirement, you normally are not willing to take on as much risk because you can't stomach another downturn like we did during the great recession," says Oliver. "For most people, as they get closer to retirement, they can stand less risk so they get more conservative. They are going to start living off their portfolio so they can't afford to lose value in their portfolio because they need the income from it."
Develop a plan to spend down your assets. Retirees need a plan for how they will convert their retirement savings into a stream of income that will pay their monthly bills. "You want to be careful not to take too much from your savings too early in retirement," says Joan Gagnon, a certified financial planner for Gagnon Wealth Management in Mansfield, Mass. "You want to have a plan about where to take your assets from and try to stay within the plan." Remember to factor in the income tax that will be due on traditional 401(k) and IRA withdrawals. "If all your money is in a 401(k) or IRA, if you want to spend $100, $30 of that may go to Uncle Sam first, and you only have $70 to spend," cautions Brezik. "You should have funds saved and accumulated outside of those types of accounts to avoid spending a lot of money on taxes."
Don't forget to take required minimum distributions. After you turn age 70½, you will be required to take annual withdrawals from your traditional 401(k) and IRA accounts. The penalty for failing to take these distributions is a stiff 50 percent penalty on the amount that should have been withdrawn.
Consider maintaining your connection to the workforce. Some retirees find they miss many of the friends and daily challenges they encountered in the workplace. If you continue to enjoy some aspects of your job, consider shifting to part-time or consulting work instead of pursuing a full-time life of leisure. "Keep an open mind and don't burn any bridges," says Oliver. "Plenty of people think they are ready for retirement, and retire and find that they really enjoy working and at least want to keep working on a part-time basis."
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Sign up for Medicare on time. You can first sign up for Medicare beginning three months before the month you turn 65. This initial enrollment period lasts until three months after age 65. If you don't sign up during this seven-month window around your 65th birthday, your monthly premiums will increase by 10 percent for each 12-month period you were eligible for, but did not enroll in, Medicare Part B. If you are covered by a group health plan based on your or your spouse's current employment after age 65, you need to sign up within eight months of leaving the job or health plan to avoid the penalty. For people who retire before age 65, you need a plan to maintain health coverage until you become eligible for Medicare, such as through COBRA continuation coverage or a spouse's health plan. "People really need to think about the cost of health insurance, especially if they are retiring from a company that has paid all their premiums," says Connie Brezik, a certified financial planner for Asset Strategies, Inc., in Casper, Wyo., and Scottsdale, Ariz. "They might not realize how big a part of their budget that is going to be."
Protect your savings. If you haven't done so already, you need to shift your primary investment strategy from growing your wealth to protecting what you have. "As you get closer to retirement, you normally are not willing to take on as much risk because you can't stomach another downturn like we did during the great recession," says Oliver. "For most people, as they get closer to retirement, they can stand less risk so they get more conservative. They are going to start living off their portfolio so they can't afford to lose value in their portfolio because they need the income from it."
Develop a plan to spend down your assets. Retirees need a plan for how they will convert their retirement savings into a stream of income that will pay their monthly bills. "You want to be careful not to take too much from your savings too early in retirement," says Joan Gagnon, a certified financial planner for Gagnon Wealth Management in Mansfield, Mass. "You want to have a plan about where to take your assets from and try to stay within the plan." Remember to factor in the income tax that will be due on traditional 401(k) and IRA withdrawals. "If all your money is in a 401(k) or IRA, if you want to spend $100, $30 of that may go to Uncle Sam first, and you only have $70 to spend," cautions Brezik. "You should have funds saved and accumulated outside of those types of accounts to avoid spending a lot of money on taxes."
Don't forget to take required minimum distributions. After you turn age 70½, you will be required to take annual withdrawals from your traditional 401(k) and IRA accounts. The penalty for failing to take these distributions is a stiff 50 percent penalty on the amount that should have been withdrawn.
Consider maintaining your connection to the workforce. Some retirees find they miss many of the friends and daily challenges they encountered in the workplace. If you continue to enjoy some aspects of your job, consider shifting to part-time or consulting work instead of pursuing a full-time life of leisure. "Keep an open mind and don't burn any bridges," says Oliver. "Plenty of people think they are ready for retirement, and retire and find that they really enjoy working and at least want to keep working on a part-time basis."
READ MORE
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