Transforming Our Retirement Landscape
How do we know if we will have enough saved for retirement?
Over the last few decades, more and more workplaces left the traditional pension-retirement, and changed over to a more individually focused retirement plan, with the emergence of 401(k)s. Less responsibility is placed on the employer to ensure their employees have enough for retirement, and more responsibility is put on the shoulders of employees to ensure they are saving enough into their retirement plans to one day be able to replace their income. Recent studies have shown that one-third of baby boomers have no money saved for retirement. On top of that, boomers have more debt than previous retiring generations. They will have to spend more out of pocket on health care.[i] These are scary statistics. Cost of living has continued to climb, with food and housing costs up 60% from 1996. Education costs are rising, and have increased eight times faster than wage growth[ii], and medical and childcare costs have doubled over the same time frame.[iii] It is not merely the fault of the average person for not stashing enough away; people have less money in their pockets to allocate to savings!
The good thing is, with a little forward thinking, there are ways to improve our retirement outlook In this article, we will go over some steps that can help you to prepare financially for your later years.
Steps to Increase Our Retirement Savings
A quick google search for “retirement headlines” reveals an interesting perspective for potential retirees. It’s no wonder people are worried about retiring, in looking at the negative news headlines below. This is just some of the articles we are reading on a daily basis:
- “What is the scariest retirement healthcare number?”
- “Working to 70 is not an easy fix to the retirement crisis”
- “U.S. agency seeks approval to take over Sears pensions”
- “U.S. retirees try to keep cool as stocks tumble”
- “A higher social security age comes with risks for many workers”
- “What the numbers really tell us about living longer in retirement”
- “Column: Loans could drain U.S. retirement plans”
Delayed retirement age, underfunded pensions, longevity concerns, the impact of debt on retirement assets—no wonder people are scared! While it may seem we are bombarded by fearful retirement headlines, we are responsible for ensuring we have a successful financial future. Here are some things we can do to prepare:
Like most things in life, communication is key. If you are planning to retire with a spouse, you need to have discussions about everything. How much is saved, what are your wants, what are your needs, where do you want to live, and when do you want to retire? You may find that you and your partner have some very different opinions. The sooner you can get on the same page, the sooner you can make a realistic plan and stick with it. It is imperative that you are open and honest. If you are behind on your savings, you may need to make this a priority. Be realistic in conversations with family, perhaps children, about what big expenses (college, wedding, etc.) you can and can’t help with, and how much you are willing to contribute. Will you have to downsize your home and relocate someplace with a lower cost of living? Or is it possible to increase your savings rate without having to make such drastic moves? The earlier you can get these conversations started the better, as they often don’t come in one easy fix.
Get Your Financial Paperwork in Order
Take the time to gather all of your investments, retirement accounts, taxable savings, values of checking and savings accounts, valuable assets, etc, and make a list. This will help you feel more organized, seeing all of your assets in one place. These investments will provide you with supplement income in retirement. Take the time to review all insurance policies at this time as well. Review all premium payments, cash values within the policies and determine what options you have for each of your policies going forward. Finally, review all estate planning documents and ensure all beneficiaries are properly identified. While these reviews may be part of a larger, on-going analysis, taking the time to organize these documents is a good first step. Make sure to have a current will, name a power of attorney, and health care proxy, and make sure you and your assets are properly insured. The more preparation you do toward having your documents up to date, the more overall prepared you will be to not only save but to continue being organized into your retirement.
Employer Matches and Retirement Investments
Take advantage of any and all workplace-match savings programs and try to max out your contributions. Make sure to have a diverse portfolio with a mix of investments, from pre-tax IRAs to automatic deposits into your savings accounts.
Attack Your Debt and Have a Plan for Cash Flow
A good philosophy for saving and budgeting is to pay yourself first. It's essential that you have an emergency savings fund because you never know what surprise expenses may pop up. Review all debts and pay down those with the highest interest rates. While paying down these higher interest debts is advisable, it also raises a concern that you may need to take a look at your cash flow. Is your monthly spending consistently higher than your monthly income? Positive cash flow is essential as you head into retirement. Take the time to review mortgage debt, home equity lines of credit and any auto loans, keeping an eye on the interest rates you are paying. It is not always the case that these need to be paid off as you head into retirement.
Figure out your Cost of Living and Streams of Income in Retirement
How much does it cost you to live each month? What expenses will be going away in retirement? Savings usually stops, and at some point, a mortgage payment may drop off. Your highest retirement spending will come in the first few years of retirement. Try to project replacing your current income. For those with positive cash flow each month, replacing current income should cover all of your expenses. Even though you are stopping work, your goal should be to have the same lifestyle as you did when you were working. Maybe your lifestyle will be even better in retirement, now that you have time to travel! Knowing how much it costs you to live each month is a good first step.
When is your retirement age? At what age does your fixed income (pension/social security) begin? Is there a gap between those two ages and do you need to rely on your savings accounts to provide you an income before your fixed sources of income begin?
Retirement finances can become very complex very quickly, what with various investments from various sources: Social Security, pensions, and other savings that can be turned into streams of income. Certain types of retirement accounts have age limits to access them or mandatory draw periods after a certain age. It may help to seek counsel from a professional to make sure you are on the right track, or to help you get there. Some financial professionals specialize in debt management or retirement planning, so depending on your specific needs you should be able to find someone to help you reach your target.
There is no easy answer to building your portfolio and preparing for your retirement. Creating a savings plan requires discipline and a willingness to set aside a certain amount of dollars today, for our life in the future. Human nature constantly struggles with the idea of delayed gratification, it goes against all of our behavioral instincts. We tend to focus on the immediate needs and distractions versus our longer-term goals. But, by carving out a savings plan, communicating clearly with your spouse and loved ones, and focus on paying down high-interest debts, you are much more likely to be prepared for retirement when you reach it. Make it a priority to consistently spend less than you bring in, and you will begin to create wealth, making early retirement a very real possibility!