Five Keys to a Sound Retirement Plan
Lots of people equate retirement planning with a single activity: saving. This is only natural, considering the armies of brokers and insurance agents that are eager to address your investing needs. I don’t want to minimize the importance of saving but, in my view, there are at least five essential activities when building a sound retirement plan.
Think About Your Retirement Lifestyle
This is one area activity that does not receive nearly enough attention. In reality, it is a critical first step. At what age do you want to retire? What do you want to do in your retirement years? It’s essential to think through the key issues and discuss them with your spouse. Think about where you want to live, how much traveling you want to do, whether you will continue to work part-time. Many use simple rules of thumb to estimate their income needs in retirement, but every situation is different. Better to give it some thought, be specific, and prioritize your goals.
Make Some Assumptions
You can’t develop a retirement plan without making some assumptions. Inflation; tax rates; investment returns; salary increases; interest rates – all factor into the calculation. We’ll never get these precisely correct, but it’s important to understand how they will impact your saving needs. With this understanding, you’ll be better equipped to measure progress and adjust along the way.
Run the Numbers
The math is not complicated, but it can be tedious. Social Security, pension benefits and your own investments all come into play. The objective is to determine your savings need, which is the difference between your estimated income needs in retirement and the expected future value of your investments and retirement benefits.
It’s tough to overstate the importance of these calculations. Again, precision is not the goal; we just want a framework that can adjust to changes in your situation over time. If you’re not comfortable with a DIY approach, find a good advisor to help you.
Finally, we get to the saving part. When investing over a long time horizon, high investing costs and taxes can decimate your returns. Make sure you take full advantage of company-sponsored savings plans or IRAs. Just as importantly, pay close attention to the fees and expenses associated with your investment choices. If your broker or investment advisor can’t (or won’t) give you a clear picture of these costs, chances are you are paying too much. Don’t fund someone else’s retirement plan at the expense of your own.
Protect Your Wealth
Any sound retirement plan must include risk management and estate planning. Make sure your future earnings are secured with life insurance and long-term disability insurance. Long-term care insurance can help manage potentially costly healthcare issues. A simple will or trust is essential to address asset distribution, custody or guardianship issues. Don’t let an unforeseen event tear down what you have worked so hard to build.
So yes, absolutely, save as much as you can. But if you want to improve the odds of a comfortable and secure retirement, make sure you save with a plan.