How much do I need for retirement? This is the question I am asked most frequently, and to be honest, there is no simple answer.
I can safely say that a married couple living in Los Angeles needs $10 million to live comfortably, but that may not be a realistic goal for everyone. The key to “enough” retirement savings is to plan and this planning should begin in your 30s and 40s.
With some honest perspective and careful planning, anyone can prepare for a retirement that maintains their lifestyle for many years to come.
When I counsel individuals or couples, I tell them to keep a few salient points in mind as they determine how much they need during retirement. I always advise new clients that an honest assessment of income versus expenses is the foundation for their retirement needs.
But incredibly, many people simply don’t think about how much it costs for them to live month to month, or year to year.
During retirement, the “how much” question gets no easier. I’ve observed that people do not realize that retirement comes with more free time, which results in higher expenses. Retirees suddenly have more time to see films, visit restaurants, and shop than they had when they were working.
Free time is a drain on personal finances and factoring in this added time and expense into the retirement equation rarely occurs when retirement, in many cases, is still years away.
That’s why a serious analysis and assessment of your cash flow and expenses is crucial. It’s necessary to balance out the life that you want and are accustomed to with the life that you will be able to finance with the income stream you will have.
Let me repeat that — you must balance the life you want with the life you can finance based on the income stream you will have.
Starting the process of retirement preparation comes when you envision your realistic expectations for the kind of life you want after you retire.
Do you want to work part-time? Will your lifestyle be conducive to living on 75 percent of your current salary? 85 percent? What are the needs of your spouse, travel plans and estate plans? Answering these questions about how you will spend your retirement is the first step in determining how to financially plan for those years.
Making arrangements for your long-term health care should also be included in your retirement plans. Current advances in medicine have enabled us to live longer and hopefully healthier lives.
But living longer means a longer draw on your retirement income and possibly part-time work into your 70s and 80s.
Start looking at acquiring long-term care insurance early, when you have the means and when you are healthy. A good rule of thumb is to start looking for long-term care insurance in your early 50s.
Putting Together Your Retirement Plan
According to a study conducted by Wharton and State Street Global Advisors, as many as 59 percents of wealthier investors have no written plan for their retirement and no specific goals for guiding their financial livelihood once they have left the workplace.
What’s more, 57 percent share some of the same concerns as all of us — rising healthcare costs in particular. From my own experience, the percentage of those who have no written plan for retirement is more than 80 percent. People just don’t think about it. Don’t be counted among that number.
Fortunately, help is available no matter what your level of income. The most important thing, again, is to figure out what your income is and what your spending is — a term the industry calls the “burn rate.”
Once the burn rate has been established, you can move forward with a financial advisor to put together a solid plan. Your financial advisor should help you analyze your goals and match them to your finances, taking into account your retirement income, tax liabilities and personal savings and investments as you develop the plan.
Often I tell clients s to subtract their age from 100, and the number you have left is the portion of your portfolio you ought to have invested in stocks. The rest should be in bonds.
For example, a 45-year-old should have 55 percent of their investments in stocks, and 45 percent in bonds. This investment mix represents your cash-flow for the years you are retired and will be what enables you to live the life you want.
You must also diversify your investments to guard against inflation and cost of living increases. Those rates change when you plan retirement, at the time you retire, or years after you’ve retired.
There are plenty of good places to diversify your money, including treasury bonds and CDs, as well as mutual funds and hedge funds. You can also lower your tax liability through annuities and tax-free municipal bonds.
Keep a diversified portfolio and hedge against three primary risks: interest rates, inflation and the devaluation of the U.S. dollar.
Choosing a Financial Advisor
Keep in mind four crucial points when you decide it’s time to talk to a financial advisor:
- One, their existing clientele. What kinds of people does he/she deal with and do you fit that profile?
- Two, does his or her philosophical approach to dealing with managing money fit with yours?
- Three, who is the financial advisor’s support staff? Since routine interactions will be with staff rather than the financial advisor directly, it’s important to know that they have a competent and skilled team behind them.
- Fourth, check them out and have a look at their background.
Resources such as the Financial Industry Regulatory Authority’s Broker Check and Central Registration Depository are your starting points.
Finally, once you’ve sat down with your financial advisor, hashed out all the details and done all the work of preparing your detailed retirement analysis, it’s a good idea to go back every year and assess your plan.
Remember, it’s your money and your retirement at stake! Are your goals and benchmarks being met? If not, what adjustments need to be made to put the plan back on track? Few of those who go through the effort of preparing a retirement plan take this step.
Most will simply let it be while the circumstances of their lives, income, and spending habits change, and the plan they carefully laid out and painstakingly built becomes outdated and ineffective. A good financial advisor will remind you to come back and reevaluate that plan periodically.
While the task of planning for your retirement may appear daunting at first look, proper and realistic preparation can help make your hopes and expectations for retirement a reality.
No matter your age or career phase, it’s not a bad thing to start making those plans now. Careful and diligent work can ensure your retirement years are enjoyable and worthy of your hard work, and the success you’ve achieved to reach them.
