Annuity Planning Company Article on Retirement Savings
A successful retirement doesn’t just happen; you’ve got to plan for it. Preferably, your retirement planning has started, but it’s never too late to start. The long ramp toward retirement focuses on saving and investing, but once retirement starts emphasis shifts to spending and safeguarding. Even though the greatest challenge in retirement, and probably your greatest fear, is outliving your money, most Americans spend less time planning their retirement than they do planning a vacation.
What does retirement planning involve? Here are the steps: First, determine what you’d ideally like to do in retirement, and then discuss it with your spouse and other loved ones. Will you spend your time traveling, enjoying hobbies, helping others, working part-time, or what? Second, estimate the retirement income you’ll have from savings, Social Security, pension [if you're lucky], and all other sources. Third, estimate your expenses making sure to take account of inflation, taxes and health care costs which are likely to be an increasing part of your budget.
Steps two and three should be done for each five-year period of your retirement and then revised annually. Fourth, if you have more income than needed, you only need to safeguard your investments to make sure they’re not lost or shrunk by bad decisions. If you have insufficient money for retirement (expenses exceed income), then you’ll need to postpone retirement, work part-time or possibly use a Reverse Mortgage to access the equity in your home. Either way, it is highly recommended that you minimize your exposure to loss and maximize the full potential of your financial resources by working with a financial advisor. They can help you determine the risk you can afford, investment options and how to position your money for best results without sacrificing safety. Don’t worry about having too little to justify a financial advisor or so much that you can ignore risk: retirement is going to be very long, filled with uncertainties, including emergencies, and going it alone is one of the greatest risks you can take.
Be realistic in your planning. For example, be aware that for a couple age 65 there is a 50% probability that one will live beyond age 90. Acknowledge that even a low rate of inflation can make a big difference in prices over the 20 to 30 years you’ll be in retirement. For example, average inflation of 3% means $1 today will be worth only 55 cents in 20 years and 41 cents in 30 years. Since 78 million boomers are entering retirement over the next two decades, the price of everything related to retirement, especially health care, is likely to rise faster than overall inflation. Inflation is a cruel tax for those on fixed incomes, and chances are your income in retirement will increase a lot slower than prices.
The boomer explosion is going to overwhelm government-provided services and benefits. This means that the relative benefits of Social Security and Medicare are going to shrink under the pressure of increased retirees. There will simply be more people receiving entitlement benefits than workers paying the bills. Every study, government and private, indicates there will be a shortage of money to support these programs. To pay for this shortfall, the government must raise taxes of all types - income (even on Social Security benefits), real estate, sales, estate, etc. The increased taxes, inflation, relative decrease of benefits combined with escalating medical care costs will be especially burdensome for those in retirement without rising incomes from wages and salaries.
If you haven’t evaluated it yet, investigate the risk you’re taking with your retirement money. Would you have a loss if the stock market lost ground? You might if your money is still in your ex-employers 401(k) plan, or if you own securities, even mutual funds, whose value is determined by the “market”. Generally, investments in stock have done well “long term”, but you may need your money before a “long time”. From November 1973 to October 1974, the S&P stock market index fell 48%, and it took over six years to recover. The last bust in the stock market was 2000 - 2002, and we’ve yet to fully recover. In the meantime, inflation marches forward with the shrinking dollar purchasing less. Much of your income in retirement is likely to be derived from your “savings and investments”, and you simply can’t afford risk of loss and the compounding of inflation. Think of retirement as the largest purchase you’ll ever make, and you can’t borrow the money to pay for it. If you lose some or all of your retirement money to bad investments, you’ll increase dramatically your chances of realizing your greatest fear: outliving your money.
How do you safeguard against the challenge of too many years and not enough money? Short of devoting your leisure time to managing your investments, you’ll need to rely on a financial advisor to show you how to build a tax-efficient income stream you can’t outlive. With help, you’ll take advantage of the triple compounding of tax-deferral to get safe growth for the money to be used years from now, and you’ll “ladder” your retirement money into an income you can’t outlive with your “next up” money readily available and in no danger of principal loss. While this may seem a daunting task, it’s easy for a financial planner that knows the options, understands risk and has experience in matching financial resources to remaining life expectancy. Like law and medicine, financial planning is best left to professionals. Your job in retirement is to enjoy life free of investment worries.
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