You wouldn’t walk down a street, scan a house from the sidewalk, dial the number on its “For Sale” sign, and buy the house. You wouldn’t immediately send a check if a complete stranger called you to pitch an exotic investment. You wouldn’t bet your family’s savings on a single spin of the roulette wheel.
The reason is obvious: big financial decisions require planning. They involve big risks, like losing a lot of money. The risk of a bad decision increases without information, thought, and analysis. For example, is the house well-built? Is it in a good neighborhood with ready access to transportation and good schools? How has the investment performed in the past? Who is offering it? There may be other options available — different houses or investments — that fit your needs better. Ultimately, buying this house or making this investment might be a great idea (gambling with your savings almost certainly isn’t), but you can’t know without further effort. And you may need expert advice to help you make good decisions with confidence.
That’s the message of National Retirement Planning Week, which is April 9 to 13, 2018. National Retirement Planning Week is a national effort to help consumers focus on their financial needs in retirement, and it presents the perfect opportunity to begin planning for retirement. Or, if you already have a retirement strategy, you can review and (possibly) adjust it to ensure it’s comprehensive and still designed to meet your goals. This article addresses some of the big challenges associated with retirement planning and suggests how you might overcome them. The goal is simple: demonstrate that retirement planning is not only possible, but also essential and achievable.
Challenge #1: I don’t know what my retirement plan is supposed to accomplish.
It’s hard to develop a plan without a goal. At the same time, you don’t need perfectly detailed goals to get started. Your goals can evolve as your plan develops and circumstances change. Be patient with yourself.
Start with an easy-to-understand goal: accumulating enough money to support a retirement lifestyle that’s roughly equivalent to your pre-retirement lifestyle. Most financial advisors would say that’s an annual income between 70 percent and 90 percent of average income in the years before retirement. Why not 100 percent? Some pre-retirement expenses may disappear or decline, especially work-related expenses (e.g., work clothes, lunches out, transportation, professional dues). Also, health insurance premiums (when you are Medicare-eligible), monthly mortgage payments (if it’s paid off or you downsize), and anything that can be bought with a senior citizens’ discount can contribute to lower expenses. Finally, with less income, you may pay federal income taxes at a lower rate, and there are no payroll taxes if you don’t work.
"It’s hard to develop a plan without a goal. At the same time, you don’t need perfectly detailed goals to get started. Your goals can evolve as your plan develops and circumstances change. Be patient with yourself."
A second, more subtle goal worth considering is reducing or insuring against risks associated with retirement and retirement savings. Three examples will illustrate this point. First, older people have a greater risk of illness or injury; however, health insurance and long-term care insurance can protect against many health-related financial risks. Second, some investments may decline in value. Worse, the decline may occur just before retirement (ask friends or family who planned to retire in 2008 or 2009). A financial expert can help you choose a mix of investments that balance investment risks with growing your retirement savings. Finally, unless you have a pension (i.e., an employer plan’s guaranteed lifetime retirement paychecks), and depending upon the amount of your retirement savings, there is a risk you will outlive your savings (longevity risk). Social Security mitigates longevity risk by providing guaranteed lifetime income, although this income equals only a portion of what you will need. There are also retirement products you can buy, like variable annuities,* to supplement Social Security with additional guaranteed lifetime income.†‡ Again, talk to a financial expert to learn more.
Challenge #2: Retirement planning is intimidating and I don’t think I can do it.
Retirement planning can have a lot of moving parts, and it requires thinking about difficult and complicated topics, like your mortality and, perhaps, spending less now to save for later. As with other complex challenges, you might want to break retirement planning into smaller pieces. For families with resources, most retirement plans involve three pots of money: Social Security, retirement savings, and non-retirement savings, like the equity in your house. Take them one at a time.
The good news is Social Security savings happen automatically for employees, since your employer sends Social Security taxes to the IRS without you doing anything. You will make two decisions: (1) your retirement age and (2) if you have a spouse, whether and how to share your benefits if one spouse pre-deceases the other. The Social Security Administration (www.ssa.gov) offers information about both decisions.
For many employees, retirement savings also can be nearly automatic. While few workers get pensions, three-quarters of workers have access to an employer-provided retirement plan. So, enroll and contribute. If you don’t have an employer, or it doesn’t offer a plan, ask an expert to help you establish an individual plan. Either way, your big decisions, apart from how much you save, will relate to investing your money, and whether to choose guaranteed lifetime income or slow, small withdrawals from savings over time. I discussed those choices in my article entitled “Retirement Paychecks” on the Studio.
Non-retirement savings present similar choices, although you may have to decide whether to keep your house or apartment, re-locate, or downsize.
So, you can do it. Just don’t try to do everything at once.
Challenge #3: It’s too late/early for me to begin retirement planning.
If you are out of school and working, or still pursuing your career, and you have any resources for retirement, you need a retirement plan. Period.
"If you are out of school and working, or still pursuing your career, and you have any resources for retirement, you need a retirement plan. Period."
Plainly, it is better to start earlier so you have more time to accumulate retirement savings. But everyone can take some retirement-related action. New workers’ salaries may be low, but most can save something, and certainly should if their employers match retirement contributions. Workers in their 40s and 50s can add to their savings, get help to invest prudently, and plan for life in retirement. Even those retiring at age 65 can expect to live, on average, another 19 years (men) or 22 years (women). Depending upon resources, that’s enough time for prudent investments to grow.
So, if you are in the workforce, there is no excuse. Plan now.
Challenge #4: Building a plan takes time and money.
Time, yes; money, maybe. But that’s merely the beginning of the discussion. The next question is, do the benefits justify investing time or money? If spending a few hours to choose strategic investments results in $500 more per month in guaranteed lifetime income, then the answer is “yes.” If planning includes an illustration of how much money you will need in retirement compared with your current savings, and visualizing that gap causes you to save more, then the answer is, once again, “yes.”
Planning involves understanding what you have, deciding what you want, and charting a path from one to the other. Understanding what you have and deciding what you want requires little more than simple math and making choices. Charting a path is often where the complexity arises. There are many variables, including longevity, illness/disability, market performance, your children’s/other family members’ needs, pre-retirement income, tax rates, your home’s value, and how much risk you will tolerate, among others. At the same time, there is a long menu of retirement products and investments from which to choose. Charting the path requires determining which products and investments will achieve your goals, while taking those variables (and the associated risks) into account.
A financial expert can help, especially with the matching task. Many retirement product options are available, so do your research, get advice, and start planning.
Challenge #5: I am worried an expert financial advisor may not serve my best interests.
Given the heated public policy debate over the rules governing retirement investment advice, this is an understandable concern. Just like with other experts in your life who advise you about important and complicated concepts and tasks — your doctor, for example — the most critical thing you can do is ask questions of any advisor you might hire. Most advisors are responsible professionals and won’t hesitate to give you honest answers.
In my article, Six Starter Steps to Avoid a Personal Retirement Crisis, on the Studio, I noted advisors have a lot of different titles. I suggested three questions you could ask to learn the truth behind this very important relationship. I also encouraged comparison shopping. Retirement planning is important enough to justify the effort.
Are there challenges to retirement planning? Of course. But none of them are so sizable that you can’t navigate the challenges and plan the best retirement possible for you given your resources and circumstances. So, take advantage of National Retirement Planning Week, and get started with your planning today.
*What is an annuity:
Annuities, including variable annuities, are long-term, tax-deferred vehicles designed for retirement, involve investment risk and may lose value. Earnings are taxable as ordinary income when distributed and may be subject to a 10% additional tax if withdrawn before age 59½.
†Guarantees are backed by the claims paying ability of the issuing insurance company.
‡Optional benefits are available for an extra charge in addition to the ongoing fees and expenses of the variable annuity.
Investing involves risk, including possible loss of principal.
The opinions and forecasts expressed are those of the author and individuals quoted and should not be construed as a recommendation or as complete.