The average American will spend 30-40 years in the workforce, raising a family, taking the annual vacation to the beach, and saving for retirement. When you are 25 years old you feel immortal and cannot imagine what it is like being 50, let alone 60 or 65 and contemplating retirement. Fortunately or unfortunately we are only immortal for a limited time. Eventually reality strikes, forcing us to consider how to have a comfortable retirement on our own terms.
Having a retirement plan done before you stop working is one of the most effective ways of being financially successful in your post-employment years. Yes, you could hit the lottery or save so much that you would never possibly have to worry about money, but chances are this is not you. Probability of winning the big jackpot is slim and life can be expensive, especially when raising a family. Needless to say, spending $20 each week on scratch off tickets is not a viable plan.
Prior to age 50 a plan can be helpful, but accumulation of investable assets should be the major focus. During these early accumulation years you want to save as much as you can, starting as early as you can. As a general guideline, saving 14% of your income each year will get you well on your way to financial success. If you save more, or receive a 401(k) match on top of saving 10% of your earnings, that is even better. Save as much as you can from an early age.
Once you reach 50 years of age getting a retirement plan done is a must. It is about this time that the dream of employment-free days starts to feel like it can become a reality. With these thoughts come the inevitable worries about being retirement ready. Have I saved enough? Will I have enough income to live a good life?
There are a number of sources available for free that can give you a general idea of where you stand. Your current 401k provider, for example, should have a retirement savings calculator available on their website. If you don’t have a 401k, Wells Fargo’s My Retirement Plan Savings Calculator is a nice basic planning resource to get you started. The downside is that the advice is generic by design. While perfectly reasonable advice, you will not receive the answer to your specific questions or advice tailored to your specific situation.
Instead we believe every retirement plan needs to be tailored to each family or individual. Your finances and your retirement dreams are like snowflakes – no two are exactly the same.
There are four specific things a retirement plan should account for:
A retirement Plan should take into account your individual spending patterns and lifestyle of the retiree – Retirement is the beginning of the next phase of life and what it looks like will differ greatly for each couple or individual. Generic planning assumes that you will need 80% of your working salary to make ends meet. This could, in fact, be correct, but more than likely not. If you plan on travelling a lot or have a large mortgage on your residence (or a vacation home) you might have a real cost of living that meets or exceeds what you spent during your working years.
A retirement plan should plan for the true cost of health care – If you think you are ok because Medicare is available to you at age 65 please think again. According to a 2015 study by Fidelity, the estimated out-of-pocket cost of health care for a retired couple at $245,000. These expenses will vary greatly, but even the healthiest among us can accrue large expenses later in life.
A retirement plan should be conservative in its approach to both spending and expected rates of investment returns – Any plan is only as good as the data you use and the assumptions you make in coming to conclusions. With every plan we make sure to “pad” the expenses by planning on slightly higher regularly occurring expenses as well as discretionary spending like travel and spoiling the grandkids. For investment returns we look to use what we consider to be reasonable forward asset class returns, not historic numbers. Current bond yields and stock market valuation levels have more impact on what to expect in the next 3-5 years than historic averages.
A retirement plan should evolve over time – A retirement plan is not a once and done document but one that evolves over time as life changes. Whether it is great than expected equity returns or a change in spending due to a lifestyle change, unplanned events happen. Ideally a plan should be revisited once a year and whenever there is a major life event.
At Magellan Financial, with the help of the Envision® Process we have the tools to help you with your retirement planning needs. To schedule a consultation or to learn more about how Magellan Financial can help, please call us at 610-437-5650 or email us at Jon.Soden@WFAFiNet.com.