Planning for Retirement

If you want to be secure in your retirement you must have a plan. If you fail to plan you are planning to fail. Most Americans are completely unprepared for their retirement and I have made it a goal of mine to reach as many people as I can to encourage them to prepare for this stage of life. One financial planning firm has a number of funny commercials out there about the length some people will go to in order to avoid talking about or putting together their financial plan. While the commercials are funny they represent a sad truth and help me understand how painful it is for some people to talk about and face these issues. I have tried to adopt a position of not offering advice unless it is asked for but I am certainly willing to talk about these issues with any of my readers that feel they need a helping hand.

During the past year I had several people talk to me about their plans, some engaging in the need to set goals, make some assumptions about how much they need in retirement and what it would take to get there. Unfortunately I also spoke to a few people who thought they had a plan but really only had a goal to retire at a certain age. While goals are an extremely important part of financial planning they must be realistic and you must put a plan in place to reach that goal.

It is really dangerous for anyone to simply say I am going to retire at any particular age without taking a hard look at how much income they will have and what their expenses are likely to be. You cannot just assume you will figure out a way to get by on whatever you have. Many people do not take a close look at this, and as a result, underestimate the expenses they will have in retirement while severely overestimating the income they will have. Fewer and Fewer people have pensions these days, and those that do have smaller pensions than people had in the past. That means for most people their only source of income in retirement is going to be from Social Security and whatever savings and investments they have.

The Social Security administration makes it pretty easy for you to calculate what you will receive in social security payments (assuming they are not reduced because of government deficits) and there are all kinds of online tools to help you figure out what stream of income you can expect from your investments. I will give you a hint, the higher your current salary the lower the percentage of that income will be replaced by Social Security. As an example if you make $50,000 a year Social security will replace approximately 40% of your salary, if you make $100,000 a year it will replace about 27% of your salary. While these are really rough estimates and your actual number will be based on your earning history over 35 years it is meant to start you thinking. You can get a much better approximation by going to the Social Security website and looking at your own numbers.  The question is, can you really live the way you want to live on 27-40% of your current income? If not how are you going to supplement those Social Security checks in retirement? What is your plan?

Once you know what your stream of income is you have to take a realistic look at what your expenses will be. There are tools to help you with this and you should not just assume you will need significantly less money in retirement. While housing cost often go down in retirement, even if you own a house with no mortgage they do not go away. There are still the taxes, insurance, and maintenance which will go up every year. While you hope you do not have to spend any money on your kids you can not necessarily count on that. And if your kids bless you with Grandchildren you may want to spend money on them. Most importantly people under estimate the cost of medical. The average cost for medical for people in their late 60s is over $10,000 a year. This is after Medicare and that cost goes for things like supplemental insurance premiums and co-pays for prescriptions and medications. This number only goes up every year for everyone and for individuals as they get older.

The sooner you start planning and investing for retirement the better but late is better than never. If you start in your 20s it should be a breeze, if you start in your fifties it will be more challenging but much better than no plan at all.  For some of my younger readers I use the analogy of heading west. Retirement is a long way off and you do not need as solid a plan as long as you are saving for retirement. Think of starting off on the east coast and every dollar you invest puts you one step closer to the west coast. Think of retirement age of how soon you want to get where you are going and location as where you want to stop your journey. You don’t necessarily need to know these answers when you’re young as long as you are on the move.  The closer you are to your desired retirement age the more important it is to make sure you have a solid plan in place. So when you are in your fifties you should know if you want to stop in Chicago, Denver Los Angles or go all the way to Honolulu. And you should definitely know when you want to be at your final destination. Once you decide the location and how soon you want to be there put a solid plan in place to reach your goal.