How Failing to Plan Can Endanger Your Retirement
One of the biggest mistakes people make when it comes to saving for retirement is failing to plan. While it might seem like a contradiction in terms to talk about saving for retirement without planning for retirement, the truth is that you can contribute to retirement plans such as 401(k)s and IRAs without doing much, if any, big picture planning. The danger in taking this approach is that in so doing you open yourself to the risk of not saving enough to adequately fund your retirement.
This is the primary peril of failing to plan for retirement. If you don’t take the time to estimate how much income you will need when you retire, you risk having to make changes to your desired retirement lifestyle as a result of a lack of funds. Instead of gambling that the amount you are saving for retirement will be enough to enable you to live comfortably when you reach that phase of your life, a better approach is to draw up a plan that tells you how much you need to set aside to adequately fund your retirement.
The Retirement Plan
Planning for future retirement can seem intimidating, but it doesn’t have to be. The main components to drawing up a retirement plan are estimating how much income you will need to live on when you retire, where the income will come from, and determining how much of your current income you can afford to set aside to help fund this amount.
When it comes to calculating your retirement income needs, while everyone’s situation is different, there are a number of rules of thumb you can use for assistance. One such rule holds that you will typically need 80% of your current income to live comfortably in retirement. While this figure will not necessarily work for everyone, it can serve as a starting point for drilling down into the retirement income amount that is right for you.
As for determining how much money to set aside for retirement, one school of thought holds that you should maximize this amount by putting as much as you can afford in retirement-oriented savings. Another approach is to target 15% of your income, while yet another says 10% is sufficient. Again, there is no one-size-fits-all strategy for how much to invest for retirement, but these guidelines can be a good place to start.
You can also use your desired retirement income to back into a retirement savings number by estimating how much money you will need in savings to fund that income. Then, you can calculate the amount you would have to set aside on a yearly basis at a given rate of growth to produce that sum. While calculating all these amounts might seem like mission impossible without an advanced degree in statistics, don’t despair – there are a number of software apps designed to crunch all these numbers for you.
The bottom line is that you should take the time to draw up a retirement plan to improve your chances of avoiding a scenario where lack of retirement income makes it impossible for you to enjoy the retirement lifestyle of your choice.
Perform a Dry Run
While there are a variety of ways to calculate how much income you will need to live comfortably in retirement, one of the methods of determining if a specified income stream will be enough to support you is to perform a dry run. This means picking a block of time where you will attempt to live on the retirement income you estimate you will need.
For instance, if your family’s average monthly income while employed is $8,000, you might estimate that you will need 80% of that amount, or $6,400 a month, while you are retired. To do a dry run, you would limit yourself to $6,400 a month for a period of time to see how it would impact your lifestyle. When performing this test, the trick is to exclude all expenses linked to your employment during the dry run. In other words, even if you are still paying for dry cleaning and commuting expenses during that time, if you would not incur these expenses during retirement, they would not be included in calculating how much you spent during that period.
On the other hand, you would want to add any new fixed expenses you expect to pay in retirement. For instance, association fees if you were moving to a community that charged a fee, or insurance payments for Medicare if they will be more than you currently pay through an employer-sponsored or other healthcare plan. Discretionary expenses such as travel, pursuing hobbies and other interests should also be included if incurred. With more time on your hands in retirement there will be more opportunities to spend money on things like this, so be sure to take this into account when calculating your income needs in retirement.
Most likely, your overall expenses in retirement, in the absence of significant healthcare costs associated with a serious illness or assisted living facility, will be lower than while you are working. However, this is not always the case, so a dry run is a good way to see how realistic your projected retirement income needs are.
Talk with a Financial Planner
While some people may have the financial background and time to draw up a retirement plan and monitor it on an ongoing basis, in many cases you can benefit from talking with an expert in the field who can assist you with these tasks. Financial planners can draw on significant resources, both technology-related and from their own experience, in offering advice on building your retirement plan and then implementing it by selecting investments suited to helping you meet your retirement investing objectives.
They often have access to sophisticated retirement and financial planning software that can help you model a variety of different retirement planning scenarios. This is helpful not only in figuring out how much money you should be saving on a regular basis to meet your savings objectives, but also when it comes to monitoring the progress of your financial plan.
For long-term investors such as those planning for retirement, the stock market has typically provided superior performance over more conservative investments such as bonds or CDs. However, along with this good long-term track record comes increased volatility. As a result, it is important to monitor the performance of your retirement investments on a regular basis. If market volatility rises, it may require adjustments to your investment planning. A financial planner can offer advice in this regard as well as helping with the initial planning process.
While the thought of planning for retirement may not seem all that exciting at first, it is nevertheless an essential component of enabling you to live your preferred lifestyle in retirement. With all the resources available to help you plan for retirement, technology and human, there is no excuse for failing to help secure your future by foregoing the necessary planning. To boost your chances of being able to retire when you want and how you want, take the time to draw up and monitor a retirement plan designed to provide you with the financial wherewithal to make your retirement dreams a reality.