Are you planning for or near retirement? If you are in your prime earning years, you should also be thinking about retirement. It is a good time to start thinking about and planning for retirement when you enter the work force. When you are out of high school or college and start working, immediately start investing in your retirement.
You are not going to work forever. Consequently, it is wise to have an exit strategy for leaving the working world and entering into retirement mode, regardless of your age. But where do you start? One advisor who you will need to assist you is a qualified financial professional.
Be wary of advisors only selling annuities. If a financial advisor only sells annuities, guess what he or she will recommend. And remember that annuities are among the highest commission products available because you are locking your investment up for a period of time and may have substantial surrender charge penalties if you need to get money out of your annuity before the end of surrender charge penalty period. An advisor who offers stocks, bonds and mutual funds, as well as annuities, or one who only advises for a fee, is often a better choice.
In order to determine how much to save for your retirement, there are four threshold questions that you must answer or guesstimate to the best of your ability and with the aid of your financial advisor.
1. What will my monthly expenses be? What are your grocery and restaurant bills? When you are retired, you may have more time at home to do cooking instead of going out to eat.Do you have a mortgage payment? Do you have any other loans which have regular monthly payments or any other regular monthly expenses that need to be covered? What are your utility bills, automobile insurance, automobile expenses? If you have two vehicles now, can you get by with one after retirement?
You may want to downsize your main residence. So instead of having the 2800 sq. foot colonial, you could downsize to a 1200 sq. foot condominium or ranch with less expenses, maintenance and upkeep.
If you have a vacation home, what are those monthly expenses? I often see new retirees initially increase the usage of a vacation home. However, the chore of moving your household multiple times a year and maintaining more than one home can get burdensome. Often retirees spend less and less time in one of the homes, which is eventually sold. It may be more economical to use an extended stay hotel or rent a house or condo for the several months during which you are staying down south in the winter or up north for the summer.
2. What will be my income, other than from my retirement savings? You will have Social Security, hopefully. You can know what that is going to be because it is shown on your annual Social Security statement. With your Social Security, if you delay the start date, you receive a larger monthly benefit. If you live past 80 or so, the overall lifetime benefit will be more than if you took it earlier. However, if do not expect to live beyond 80, you may be better off taking your benefits earlier.
If you do not need your Social Security benefits at age 62, you still may want to start them as early as possible. Since you do not need that income, you can bank your entire Social Security payments each month and add it to your retirement savings. The earnings on the additional savings could exceed the increase in your Social Security, had you waited until your full retirement age to begin receiving benefits.
Do you have a monthly pension from your employer or former employers? Does the monthly benefit change depending upon your age at time it commences? You may have rental properties that generate a monthly income to you.
Retirement income over which you have some control is part time work. Many retirees continue to work out of necessity, but often times you may work because it is fun. Work becomes much more enjoyable when you do not have to work. You can change careers and work in a completely different field. With these hobby jobs, you can work as little or as much as you want and if you earn more than you need to live on, you can just bank the excess, to be used when you do need it.
3. How long will I live after I retire? This is a pretty loaded question and a difficult one to face because you are looking your own mortality. To answer this question, you have to look at a few things. You have to look at your family genes. How long did your Mom or Dad live? Or your grandparents? Or even your siblings? Do you have any debilitating illness or chronic conditions that could affect your life expectancy?
There are life expectancy tables that you can review, such as those by the Michigan Department of Human Services, the Internal Revenue Service or life insurance and/or annuity companies. Females generally have longer life expectancies than males, on average. Life expectancies in the US are increasing. It is often said that 80 is the new 65. Current 80 year olds can be as active as 65 years olds were several decades ago.
4. How much will my investments earn? Look at all your cash, CDs, stocks, bonds, mutual funds and other investments in all your accounts including IRAs, 401(k)s and other retirement accounts. If you look at historical rates of return over the last hundred years per The Time Traveler’s Investment Calculator app, rates of return have averaged about 3% for short-term funds, 6% for long term funds and 9% for stocks.
You would think that the decade of 2000 would have changed historical expectations since stocks actually had a slight negative rate of return over the entire decade. However, if you looked at rates of return over the last 20 years, including the decade of 2000, we are basically at the 100 year historical averages. Now can you count on those rates of return over the next five or ten years? Probably not. But over the next 20 or 30 years, maybe.
Run the numbers. Work with your financial advisor and plan ahead. With the answers, or guesstimates of the answers to these four crucial questions, you should be able to determine how much you will need to save between now and your retirement. Usually the sooner you start your retirement savings, the sooner you will reach your retirement goals.
By: Matthew M, Wallace, CPA, JD
Published edited November 27, 2011 in The Times Herald newspaper, Port Huron, Michigan as: 4 not-so-easy retirement questions