Ten Golden Rules For Retirement Planning
In all likelihood, you are not going to die at your desk.
Though it’s true that people are working longer, the majority of us will still stop working and retire at some point, so we need to plan for it.
Not convinced, try this. According to AXA Equitable’s latest global retirement reality study, workers say they'll stay on the job until they are 61, four years more than the current average age of retirees.
Moreover, most are expecting a lower standard of living. On a global basis, 43 percent of those still in the workforce and 30 percent of already retired believe their retirement income will be insufficient.
If this sounds familiar, read on for basics on how to get where you need to be.
1. Educate yourself, so you can take part in the planning process.
“Most people will benefit from good advice, from a good advisor,” says Lawrence Glazer, managing partner at Mayflower Advisors in Boston. “But at the end of the day, it’s your money, and you want to understand why that advice is being given so that you can help map out that plan.”
2. Make an honest assessment of where you are in terms of your finances.
“Understand where you stand and know what your assets and liabilities are,” says Seth Varnhagen, president of North Castle Advisors in Armonk, N.Y.
If the economic turmoil of recent years prompted you to file savings and retirement statements without opening them, stop it.
3. Do the math, so you act on information, not emotion.
Many people make retirement planning decisions based on feelings and intuition gleaned from minimal amounts of data they’ve heard on T.V. or the radio, says Colin McKenna, VP and district manager of AXA Advisors in New York City.
Instead, they should factor in capital gains, income and estate taxes, as well as savings rates and investment returns.
Doing calculations, adds Varnhagen, based on these and other assumptions, like the rate of inflation, the rate of appreciation of your investment assets, and when you plan to retire and how long you think you think you’ll live, can help you determine how much money you’ll need. There are many tools available online.
In case you were wondering, the industry rule of thumb goes like this: If you do not want to reduce principal, it is reasonable to assume that you can live on 4 percent of your assets in retirement. If you have $1 million, that’s $40,000 per year.
4. Cash is not king.
"We see a lot of retirees who are very risk adverse because of what’s happened in the economy, so they are sitting in cash," says Glazer. “They’re driving all over town chasing an extra quarter of a percent in a bank CD.”
The reality, adds Glazer, is that they are withdrawing more from those accounts to support their lifestyle than the fixed income investment is really going to earn.
If you have been in cash and start to move into securities, apply apply dollar cost averaging -- a simple strategy that puts money into the market gradually rather than in a lump sum.
“We might split that money into 12 equal parts,” say Glazer. “If the market goes up, you are clearly going to participate, but it has an eye toward capital preservation if the market has a correction.”
5. Make extra mortgage payments.
If you are 50 and just took out a 30-year loan, and you want retire debt free in ten years, something is out of whack. You’re going to have to reallocate funds a bit. Refinance the mortgage to 15-years, so you pay less in interest and/or make additional payments to whittle down the loan's principal faster.
6. Don’t use retirement assets for living right now.
This one may sound like a no brainer, but it is a big red flag, says Varnhagen. If you lost your job during the economic downturn, it might seem like you have no other option than to dip into retirement assets.
The better option is to figure out a way to reduce your standard of living. We are supposed to be saving for retirement. It’s a very difficult situation, but people’s retirement funds aren’t infinite.
7. Live on a budget; cut back where you can, not where you can’t.
This will help you achieve tips five and six.
"Budgeting can be a big turn off. People think of cutting out the pleasures in life," says Glazer. "That is not necessarily the case. Know where your money is going and what you are paying for. Are you getting a good value for your dollars?"
There are usually costs to eliminate or reduce.
8. Automate savings.
If you work at a company, which offers a401(k) match, find a way contribute yourself so you can take advantage of it. It’s free money.
Many people spend a lot of time thinking about investing and they are not even contributing to their retirement plan in the first place where they could be getting a tax benefit. If it comes out of your paycheck before you even see it, who cares?
9. Have a predetermined asset allocation strategy.
For most people,60 percent in equities and 40 percent in fixed income is a good rule of thumb. Rebalance your portfolio on a periodic basis, regardless of what's hot or not.
Your plan will change based on how far you are from retirement (younger investor could be more heavily weighted in stocks, retirees in bonds).
Many individuals, adds Glazer, worry too much about the products and should think more about the process because the products today are much more of a commodity.
10. Organize and consolidate.
It’s common for retirement and investment money to be spread out in several accounts, especially if you've changed jobs a fair amount and those previous employers had 401(k) plans.
If so, you can never see the total investment picture, says Varnhagen. His solution: Consolidate in a single IRA.
Maybe it's the turning of the calendar or that little bit of a tailwind wind in our economy's sail, but if you’re thinking about retirement, do something about it. Say yes to the New Year, not to the old you.