5 Ways to Better Prepare for Retirement
Things were very different when our parents planned for their retirement. In the past, workers built up their retirement income by working for a single employer for 30 years, and many retirees enjoyed generous pensions that would carry them through their retirement years.
Today, working for a single employer is rare, and gaining access to an employer-paid pension that will support you through your retirement years is practically unheard of. Longer life expectancies and rising healthcare costs further exacerbate these challenges.
Consequently, it’s now more critical than ever to properly plan for retirement well in advance. No matter how close to (or far away from) retirement you are, here are a few steps you can take to better prepare.
Save as much as possible
We won’t spend much time on this since you’ve likely been told—ad nauseum—to save as much money as possible: including maximizing any retirement plan contributions and saving for a rainy day.
However, we will acknowledge the fact that retirement is expensive. Therefore, you’ll not only need to determine how to afford retirement but also how to not outlive your retirement savings. While everyone’s situation is different, a common rule of thumb is that you’ll need 70 to 90% of your pre-retirement income to maintain your chosen standard of living. For example, if you earn $100,000 a year before retirement, you should expect to require between $70,000 and $90,000 per year during retirement. While this number may seem high to you (and it just might be), know that per the latest U.S. Bureau of Labor Statistics Consumer Expenditure Survey, the average retiree household (led by someone age 65 or older) spends $52,141 per year.
Know (before you retire) how government-run programs work
Medicare, the national health insurance program for U.S. citizens and permanent legal residents, is the most common insurance option for retirees. Since the program and its coverage play an important role in medical costs as you age, it’s imperative you have at least a high-level understanding of how Medicare works. Doing so can potentially save you money and help you avoid common mistakes such as missing the enrollment deadline or not knowing that a boost in your income can boost your Medicare premiums as well.
Social Security is another government program you should familiarize yourself with prior to retirement. For example, did you know that choosing to receive benefits before you reach your full retirement age (as early as age 62) means you’ll receive a permanent reduction of your monthly benefit? Furthermore, if you’re working while collecting Social Security before your full retirement age, did you know that Social Security can temporarily reduce your monthly benefits based on how much you earn? These are just some of many scenarios you’ll need to navigate through—ideally with a professional who can help guide you.
Familiarize yourself with investing basics
Irrespective of how you choose to invest, familiarize yourself with a few key investing concepts in order to align those investment products with your goals.
The first concept is “time horizon”: the period of time you expect to hold your investment until you need the money back, driving the types of investments that land in your portfolio. When you’re younger, you can ride out market volatility with the benefit of time to recover from significant dips. As a result, you can take on more risk (i.e., more exposure to stocks). As you get older, it becomes more difficult to rebound from a significant market correction or (eek!) a crash, given the shorter time frame. As a result, your portfolio strategy typically changes as you approach retirement, and many of your investments move into short-term vehicles with lower risk (such as bonds and saving accounts). A failure to consider time horizon in your plans can potentially mean taking on unnecessary risk and accumulating much less money than you had planned for retirement.
Another concept to know is risk tolerance. As we mentioned earlier, when you’re younger you should take on more risk as you’ll have time to ride out market volatility (as a general rule). Yet, how much risk you accept is entirely up to you—often based on your time horizon, financial goals, and personality (some people are much more comfortable with large swings in the value of their investments than others). The biggest danger of investing without accounting for risk tolerance is that you’ll operate under stress and act emotionally during volatile markets. Doing so often leads to knee-jerk choices—such as selling when your investments are low—which can result in blunders. Consequently, and in many cases, these mistakes can destroy financial futures and thus stifle the ability to enjoy retirement.
A third concept is rebalancing: the act of adjusting (buying and selling) your investments to restore your portfolio weights to their original makeup prior to market fluctuations. More specifically, rebalancing is a strategy that involves selling investments that have increased in value while buying others that have decreased but still have merit. While you may not need to rebalance on a frequent basis, a failure to do so at all may prevent you from optimizing the value of your portfolio.
Know that a successful retirement isn’t just about money
While retirement is in many ways all it’s cracked up to be, that’s not to say it doesn’t come with its fair share of unique challenges. Financial stress can potentially play a big role, but apart from that, many retirees are also often surprised to find they struggle with the transition to retirement life—in part because they have a lot more time on their hands. Here are some tips to help you better prepare for non-financial aspects of retirement.
Develop a vision and determine how much money you’ll need to implement it
Thinking about where you and your spouse want to live during retirement is a good start. Should you both envision residing someplace new, consider renting before you buy as a practical experiment. This is especially important if this new area is located far away from friends and family or you haven’t previously lived there. As a worst-case scenario, if you both find yourselves unhappy in this new locale, you’ll likely enjoy the ability to pivot more quickly and with less hassle given no need to sell a home.
After deciding where to live, spend time figuring out what you plan to do with your newfound freedom. Regardless of what you decide, the goal here is to find new, interesting activities to fill your time while putting your mind and body to work. You want to pinpoint pursuits that inspire you and give you a new sense of purpose.
Once you nail down a shared retirement vision, you’ll need to determine if and when—from a financial perspective—you can both actually implement the same.
There are several topics to consider here, with your home as a perfect example. Housing is in fact the most significant expense for the average retiree household: including mortgage, rent, property taxes, insurance, maintenance, and repairs. More specifically, the average retiree household pays an average of $17,454 per year ($1,455 per month) on housing expenses—representing almost 35% of their annual expenditures. Paying off your mortgage and building equity (or even downsizing) prior to fully retiring is not only a good first step but one of the smartest actions you can take. Other topics you’ll need to address should, at a minimum, include transportation and healthcare: some of the biggest expenses retirees face.
In sum: tips to prepare for retirement success
While not intended to be an exhaustive list, working your way through these steps will help better prepare you for a more enjoyable retirement. Working with a financial advisor can help you minimize the planning complexities and make you feel more confident in your decisions.
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Vision Retirement is an independent registered advisor (RIA) firm headquartered in Ridgewood, New Jersey. Launched in 2006 to better help people prepare for retirement and feel more confident in their decision-making, our firm’s mission is to provide clients with clarity and guidance so they can enjoy a comfortable and stress-free retirement. To schedule a no-obligation consultation with one of our financial advisors, please click here.
Disclosures:
This document is a summary only and is not intended to provide specific advice or recommendations for any individual or business.