With the stock market decline of the last three years and the sluggish economy, many of us have seen our best-laid retirement plans in jeopardy. It’s to the point where the mainstream press blares headlines such as “Will I Ever Be Able To Retire?” (Actually, that kind of hysteria is probably a good sign that everything will be okay.)
Rather than throw up your hands in despair, though, keep in mind these broad decisions you can make now that will have a huge impact on your retirement years.
Save More Now – This may seem too obvious, but it is often overlooked, and it should be seriously pursued. The acid test is that you should be saving until it hurts, that is, to the point that your discretionary spending is affected. And even with the recent tax law changes, you should still take full advantage of employer retirement plans.
There are other questions that can create saving opportunities. Do you really need to keep trading up houses? Do you really need a new car as often as in the past? Do you really use your memberships and subscriptions? Can a little more planning or research help you save money on travel and big ticket purchases?
There can be other priorities that make saving difficult, such as children’s education. In trying to reach a balance, though, keep in mind that there are other ways to pay for college, but how else will you be taken care of in retirement if you can’t do it yourself.
Earn More on Your Investments – This approach is the most risky because it is the most difficult to control. Pursuing greater potential return entails greater risk, and trying to earn more can backfire and leave you even worse off than before.
Indeed, a recent study by Dalbar, a Boston research firm, concluded that investors’ emotions are their worst enemy. Investors try to improve their gains by taking advantages of market cycles. Unfortunately, they invariably wait too long, and end up buying high and selling low. As a result, both stock and bond investors earned only a fraction of the long-term return of the overall stock and bond markets.
The best way to earn more is to understand the value of proper asset allocation and diversification. Make sure your asset allocation is consistent with your time horizon. Rebalance your portfolio over time, and make adjustments when parts of the portfolio have significant gains. And do whatever is necessary, including using financial advisors, to keep your emotions in check.
Spend Less Money in Retirement – The rule of thumb is that retirees need between 60% and 80% of the pre-retirement income, and most retirees end up closer to 80%. In reality, retirement has several phases that have different spending profiles.
The first transition year of retirement often involves higher spending as the retirement lifestyle gets established. Likewise, the active retirement years include spending on travel and all the things retirees have been looking forward to for years. Next come the sedentary years, and here is where spending goes down dramatically. The final years of retirement are difficult to predict, as health care costs can be significant.
The key to controlling retirement spending is realistic planning. Priorities must be set, and tough decisions may have to be made between conflicting demands of family, philanthropy and your own lifestyle. Health care should be resolved before retirement, and long-term care insurance should be considered. And as much as we would all like to retire to a cottage on the beach, it may be financially out of reach.
Spend Less Time in Retirement – Demographic changes have created a growing need for older workers. There are plenty of anecdotes of people working longer and of retirees returning to work. At the same time, younger retirees often find that they miss the challenges and interactions of work.
Retirement offers the opportunity to work without the pressure of higher earnings and raising a family. Consider jobs that match your hobbies or other interests and that are convenient and match your retirement lifestyle. Any additional income will ease the financial burden of retirement.
The other factor in longer retirements, of course, is longer life expectancies. Maintain some flexibility in your planning rather than focusing on a certain age. Make sure that estate planning and health care issues are resolved well in advance of your final years.
Retirement is a time of great change, and can be both exciting and scary. By making good decisions well in advance of retirement and taking control of your finances, you can fully enjoy those golden years.