Planning for retirement

Survey after survey shows that Americans lack financial planning for retirement. In a survey conduced by Matthew Greenwald and Associates in March of 2004 of 500 pre-retirees:

• 6% believe they will never retire,

• 36% believe they will retire at age 66 or older,

• 62% believe they will use Medicare to pay for long-term-care services,

• 40% believe they will use health insurance to pay for long-term-care services,

• 42% said they have given little or no thought to where they will live when they retire,

• 42% lack a plan to manage their savings and spending so that money lasts through retirement, and

• 79% report little or no concern about whether they will have enough money to live comfortably during retirement.

Now, more than ever, it is essential to plan for retirement. Retirement is a social concept that was invented during the industrial revolution to get older workers out of the work force. It is not a God given right

In most cases, if we don't make retirement a priority throughout our working life, we will not be able to ever stop working.

For the purposes of planning, think of your retirement as the transition from living off income earned from work to income earned primarily from investments. We planners use the term "Financial Independence" as a euphemism for this time of life.

A personal journey

Retirement is a very personal journey for most of us. Because so many of us feel our personal worth includes being productive, retirement is emotionally confronting. Once we are no longer working, who are we?

In our work with clients who are planning for retirement, we have discovered that the first and most important aspect of our work is to define what "retirement" means. Depending on each client's vitality, health and lifestyle, retirement may mean living a more balanced life which includes work but also leisure time, hobby time, and travel. For some, retirement may simply mean a job or profession change. Retirement may mean realizing long-time dreams. And, for some, retirement may be forced by health issues.

The finite pot

Financially, retirement causes another phenomenon. For our working lives, many of us feel we can impact our fortunes. When we stop working, this feeling of earning power and limitless financial possibility becomes a finite. We have what we have, with very predictable sources of income like Social Security and/or our pension and investments. We need to make our savings last for the rest of our lifetimes.

The brass tacks of retirement planning

Because for most of us, retirement is something we must plan and save for our whole working lives, it pays to assess our retirement assets and intentions every so often throughout our working lives. Every five years or so, asses whether you are on track for retirement. Give yourself the knowledge you need to create the future you dream of.

We feel that the pre-retirement phase is an important time to come and see us. We will look at your whole financial picture and help you navigate the important choices you need to make.

No matter how old you are, save for retirement. If you are in your twenties, start saving something. Your savings dollars will be compounded by the amount of time they have to grow. The early retirement savings dollars allow you to be in much better shape as you get older. If you have matching dollars in your 401k, "max" the match if at all possible financially. Put away more if possible. If you have good savings habits early you have many more choices later in life.

When you are five years away from retirement, it is wise to thoroughly assess your overall situation with us to see if you are on track. The key question is: Will you be able to retire with enough money to live the quality of life you want? If you do great, if not you have choices:

• Retire later

• Live on less

• Take more risk in your investments hoping for more return

Shaping your personal retirement

Here are the basic questions to consider for yourself and your family:

1. How much do we spend every month? Every year? (The yearly numbers include taxes and non-monthly expenses such as holiday spending.)

1a. When will our mortgage be paid off?

1. How much, if anything, will we earn in the early years of retirement?

1. When do each of us plan to take Social Security? How much do we each expect it to be?

1. How many years to we see in Phase One, (the active years)?

1. How many year do we see in Phase Two, (fully retired, slowing down)

1. How many years do we see in Phase Three, (the quiet years).

1. How long will each of us live?

1. Do either of us expect to get a pension or defined benefit plan? How much per month? Is it inflation adjusted?

1. Do either of us expect an inheritance or other windfall during these years?

1. What do we expect the average rate of inflation to be throughout our retirement? (This number is between 3% and 4%. We recommend you plan using 4%. This number is the historical average. In recent years, it's been less, but at times in history, it's been much more.)

1. How much money do we want to have at death to pay taxes, leave to children and or bury each of us?

1. What are our assets at retirement aside from pension and Social Security?

1. Does retirement include using money from our home? Will we move to a smaller house or take a reverse mortgage?

1. At what rate of return do we expect our assets to grow? (Remember, this rate of return minus your inflation number is your "real rate of return". If you expect your investments to grow at 6% and inflation is 4%, you are really growing your investment value by 2%.) Some years, you will earn more, and some years your investments may not keep up with inflation.

These questions set the stage for defining your family's retirement lifestyle and resources. Once you know the parameters of your personal retirement, we can help you determine if you are on track and recommend strategies and investments to make your retirement dream a reality.

Barbara Bachelder, CFP® for Wealth by Design, LLC