You, sir, need a plan.
A recent survey shows that people who've prepared a personal financial plan are more likely to feel as if they're on track to meet financial goals, like saving for retirement. That makes perfect sense, since it's hard to know whether you're on course if you haven't mapped one out.
Similarly, stats from the Employee Benefit Research Institute's Retirement Confidence Survey demonstrate that people who've made an attempt to calculate how much they'll need for retirement not only are more likely to put money away, they also aspire to higher savings targets.
But the payoff you get from planning extends beyond having a greater chance of achieving a secure and comfortable retirement down the road. Research also confirms that people who take control of their finances tend to be happier about their lives than those who don't. In effect, you get to reap at least some of the reward of planning and saving for retirement before you actually retire.
So, how can you create a retirement plan that can help you simultaneously feel better about your life today and improve your retirement prospects down the road? Here's a three-step guide:
1. Take stock of where you stand now: Start by pulling together the current balances of any money you have tucked away for retirement in all types of accounts -- 401(k)s, IRAs, other company savings plans, even savings earmarked for retirement that are held in taxable accounts.
After you've added up all the balances, estimate the percentage of your total savings you have in each of these three broad asset categories: stocks (including stock mutual funds), bonds (and bond mutual funds) and cash equivalents (money-market funds, money-market accounts, CDs, etc.)
Then calculate the percentage of your gross annual income that you save in a 401(k) or other workplace plans (including any company matching funds) and note the dollar amount that you stash in investments outside your workplace plan.
2. Plug this information into a good retirement calculator. By "good," I mean a calculator that employes Monte Carlo-type simulations to allow for the variability in investment returns.
In addition to the savings and investment information I mentioned above, you'll also want to include an estimate of the age you intend to retire, your projected Social Security benefit and the percentage of your pre-retirement salary you'll need to maintain an acceptable standard of living in retirement.
Clearly, the younger you are, the "squishier" these estimates are likely to be. Just do your best and be reasonable.
If you're 40 and just beginning to save, then it would probably be unrealistic to expect to retire anytime before your mid-to-late '60s, and even that may be ambitious.
As for the percentage of pre-retirement income you'll require, anywhere between 70% to 90% is a credible estimate. You can get your projected Social Security benefit by going to Social Security's Retirement Estimator.
Once you've loaded all this information into the calculator, you'll get an estimate of the probability you'll be able to retire at the age you indicated with the income you specified. If you haven't been saving and investing regularly for retirement, your chances are probably going to be uncomfortably low -- maybe even well below 50%.
But don't panic. Your goal at this point is to improve your prospects as much as possible in the time you have left. The way to do that is to rerun the analysis with different assumptions to see which changes, alone and in combination with others, improve your outlook the most.
What you'll likely find is that you'll get the biggest boost by saving more and postponing retirement a few years. Investing more aggressively isn't likely to help as much, and could backfire.
Even though investing better isn't likely to improve your outlook as much as saving more or working a few more years, you don't want to squander your savings on a haphazard investment strategy or foolish investments.
So I recommend you settle on an asset allocation, or stocks-bonds mix, that's appropriate for your age and, aside from occasional rebalancing, leave it alone, except to shift more toward bonds as you get closer to retirement. Creating as much of that portfolio as possible with index funds will hold costs down and increase your potential return. If you're not confident about your ability to build a portfolio on your own, you can invest in a target-date retirement fund or use one as a guide for creating your own portfolio.
3. Follow through -- and periodically reassess. All this effort will be for naught, however, if you don't actually put the plan into place and, most importantly, save as much as you can.
You'll get the biggest bang for your savings buck by contributing to tax-advantaged plans like a 401(k) or IRA. If the 401(k) offers matching funds, be sure to contribute at least enough to get the full match.
Once you've exhausted your tax-advantaged options, you can move on to tax-efficient investments, such as index funds, ETFs or tax-managed funds, in taxable accounts.
Retirement planning isn't something you do once and then forget about it. You'll need to periodically assess your progress and make adjustments to stay on track. So go through the process I've outlined every couple of years, stepping up the frequency to annually as your career winds down.
When you're within ten or so years of your anticipated retirement date, you could very well find that, despite your best efforts, you haven't accumulated enough resources to allow you to retire on schedule and lead the lifestyle you'd like. At that point, you can weigh options such as working longer, taking a part-time gig in retirement, scaling back your post-career lifestyle or looking for ways to stretch your resources by, say, taking out a reverse mortgage or relocating to an area with lower living costs.
Ultimately, no plan can guarantee you'll be able to achieve the retirement you envision. But I can assure you that your chances of retiring in comfort will be much, much lower if you don't have a plan at all.
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