A Financial Warm Up
Most of us know it is smart to save money for those big-ticket items we really want to buy – a new television or car or home. Yet you may not realize that probably the most expensive thing you will ever buy in your lifetime is your retirement.
Perhaps you’ve never thought of “buying” your retirement. Yet that is exactly what you do when you put money into a retirement nest egg. You are paying today for the cost of your retirement tomorrow.
The cost of those future years is getting more expensive, for two reasons. First, we live longer after we retire – with many of us spending 15, 25, even 30 years in retirement – and we are more active.
Second, you may have to shoulder a greater chunk of the cost of your retirement because fewer companies are providing traditional pension plans. Many retirement plans today, such as the popular 401(k), are paid for primarily by the employee, not the employer. You may not have a retirement plan available at work or you may be self-employed. This puts the responsibility of choosing retirement investments squarely on your shoulders.
Approximately 50% of employees are earning retirement benefits at work but are not familiar with the basics of investing. Many people mistakenly believe that Social Security will pay for all or most of their retirement needs. The fact is, since its inception, Social Security has provided a minimum foundation of protection. A comfortable retirement usually requires Social Security, employer-based retirement plan benefits, personal savings and investments.
In short, paying for the retirement you truly desire is ultimately your responsibility. You must take charge. You are the architect of your financial future.
That may sound like an impossible task. Many of us live paycheck to paycheck, barely making ends meet. You may have more pressing financial needs and goals than “buying” something so far in the future. Or perhaps you’ve waited until close to retirement before starting to save. You still may be able to afford to buy the kind of retirement you want. Whether you are 18 or 58, you can take steps toward a better, more secure future.
It starts with a dream, the dream of a secure retirement. Yet like many people you may wonder how you can achieve that dream when so many other financial issues have priority.
Managing Your Financial Life – Besides trying to pay for daily living expenses, you may need to buy a car, pay off debts, save for your children’s education, take a vacation, or buy a home. You may have aging parents to support. You may be going through a major event in your life such as starting a new job, getting married or divorced, raising children, or dealing with a death in the family.
How do you manage all these financial challenges and at the same time try to “buy” a secure retirement? How do you turn your dreams into reality?
- Start by writing down each of your goals. You may want to have family members come up with ideas. Don’t leave something out because you don’t think you can afford it. This is your “wish list.”
- Organize your goals into two categories. Put all goals you want to accomplish within the next 5 years or less in the “-5” category. Put all goals that will take longer than 5 years in “5+” category.
- Organize your goals in order of priority. Make retirement a priority! This needs to be among your goals regardless of your age.
Beginning Your Savings Plan
- Calculate your net worth.
- Review your net worth at least annually.
- Identify other financial resources not included in your net worth.
- Life insurance policies.
- Social Security survivor’s benefits.
- Health care coverage.
- Disability insurance.
- Liability insurance.
- Auto and home insurance.
Envision Your Retirement – Retirement is a state of mind as well as a financial issue. You are not so much retiring from work as you are moving into another stage of your life. Some people call retirement a “new career”.
What do you want to do when you retire? Will you move? Will you work? The answers to these questions are crucial when determining how much money you will need for the retirement you desire – and how much you’ll need to save between now and then.
Planning for Retirement While You Are Still Young – Retirement probably seems vague and far off at this stage of your life. Besides, you have other things to buy right now. You will probably have to pay for more of your own retirement than earlier generations. The sooner you get stated, the better.
You have one huge ally – time. You can start small and grow. Even setting aside a small portion of your paycheck each pay will pay off in big dollars later. Company retirement plans are the easiest way to save. If you’re not already in your employer’s plan, sign up today.
You can afford to invest more aggressively. You have years to overcome the inevitable ups and downs of the stock market. Developing the habit of saving for retirement is easier when you are young.
How to Prepare for Retirement When There’s Little Time Left – What if retirement is just around the corner and you haven’t saved enough?
- It’s never too late to start. It’s only too late if you don’t start at all.
- Sock it away. Pump everything you can into your tax-sheltered retirement plans and personal savings. Try to put at least 20% of your income.
- Reduce expenses.
- Take a second job or work extra hours.
- Make sure your investments are part of the solution, not part of the problem.
- Retire later. You may not need to work full time beyond your planned retirement age. Part time may be enough.
- Refine your goal. You may have to live a less expensive lifestyle in retirement.
- Delay taking Social Security. Benefits will be higher when you start taking them.
- Make use of your home. Rent out a room or move to a less expensive home and save the profits.
Now that you have a clearer picture of your retirement goal, it’s time to estimate how large your retirement nest egg will need to be and how much you need to save each month to buy that goal. This step is critical.
Estimate How Much You Need to Save for Retirement
- How much retirement income will I need?
- How long will I live in retirement?
- What other sources of income will I have in addition to Social Security?
- What savings do I already have for retirement?
- What adjustments must be made for inflation?
- What will my investments return?
- How many years do I have left until I retire?
- How much should I save each month?
Now comes the tough part. You have a rough idea of how much you need to save each month to reach your retirement goal. But how do you find that money? Where does it come from?
“Spend” for Retirement – There’s one simple trick for saving for any goal: spend less than you earn. That’s not easy if you have trouble making ends meet or if you find it difficult to resist spending whatever money you have in hand.
A spending plan is a guide for how we want to spend our money.
- Include savings as an expense.
- Subtract expenses from income.
- Cut expenses.
- Increase income.
Tips – even after you’ve tried to cut expenses and increase income, you may still have trouble saving enough for retirement and your other goals.
- Pay yourself first.
- Put bonuses and raises toward savings.
- Make saving a habit.
- Revisit your spending plan every few months.