Planning for Retirement
It's never too early to start thinking about saving for retirement
Illustration by Victoria Marcelino
You’ve seen those ubiquitous investment company TV ads that are designed to scare you into thinking you might end up in severely reduced circumstances in old age instead of being able to enjoy a comfortable and secure retirement.
There’s the one featuring geriatric lifeguards, firefighters and a “D.J. Nana” with each singing “I’m 85 and I want to go home” to the tune of Harry Belafonte’s famous “Banana Boat Song.” In another spot, a middle-aged woman reveals her recurring dream that she’s 85 and forced to work a job requiring she suffer the indignity of wearing a hot dog suit.
The marketing mavens for those financial services companies certainly understand their target audience. Experts agree that running out of money in retirement is one of seniors’ biggest fears.
But these nightmares need never manifest into reality as long as you plan how to properly spend your nest egg wisely, so that it lasts a lifetime.
Though that’s often easier said than done.
“I don’t want to frighten anyone, but this is an important issue for people to understand and they need to start paying attention to it immediately,” says Todd Fahey, the New Hampshire state director of AARP. “It comes down to a basic math problem: What is your income and what are your expenses, and somewhere the two need to match up. There is a playbook, if you will, for achieving retirement readiness and some retirement security. But it will not happen organically. One needs to do the work.”
After working in a chosen field for decades and putting money aside in investments along the way, many people soon discover that coming up with a smart spending strategy for the next part of their lives is just as taxing, if not more so, as saving to build the retirement account was in the first place.
Now you have a new job, and it’s a mighty tough one. It’s incumbent upon you to make sure you know how much money you can afford to spend each year so that your savings last through what can be a 30-year retirement, or one potentially even longer, now that seniors lead much healthier lifestyles that result in increasing life expectancy rates for women and men.
Financial advisors generally recommend saving enough to cover 70 to 85 percent of your pre-retirement income, but you’ll have to come up with the individual formula that works best for you. Otherwise, what’s the point of scrimping and saving for your golden years?
For some time, and especially during the run-up of the bull market that followed the Great Recession, many professional financial planners used the 4 percent rule as the gold standard. Simply put, if an investor withdrew 4 percent of the money in his or her account in the first retirement year and then adjusted that annually for inflation and combined that amount with additional income from Social Security benefits, pensions or annuities, and any other revenue, the account assets should last a lifetime.
But times have changed.
The last quarter of 2018 saw turbulent weeks on Wall Street as the bears began roaring again. There was mayhem in the financial markets as they experienced wild swings amid worries of another economic slowdown. Talks of trade wars, tariffs, tax code changes, rising interest rates, potential political upheaval, and various other factors contributed to the hair trigger volatility in the markets.
Now the so-called smart money says that in this environment you can’t simply select an arbitrary annual withdrawal rate and naïvely stick to it throughout your retirement.
“If you use even the numbers of 3 percent, 4 percent or 5 percent (annual withdrawals), one still needs to have a fair amount of money saved to be able to reasonably rely upon that to be able to make ends meet in retirement,” says Fahey.
Complicating the issue for retirees trying to come up with a practical plan is the unpredictability of increasing health care costs, the negative impact of rising inflation on spending power, unanticipated life changes and unforeseen emergencies.
Expect the unexpected.
Suze Orman, the celebrated financial wizard, counsels that, instead of relying upon the 4 percent rule, savvy seniors should develop a strategy of weighing wants versus needs when it comes to keeping your nest egg from cracking.
While you can see yourself behind the wheel of that shiny, new red Corvette you’ve lusted for since high school, a utilitarian Chevy will get you where you need to go just as well and without the astronomical price tag, high registration costs and big insurance premiums.
“Every time you’re about to make a purchase, ask yourself, ‘Is this a need or a want?’ If it’s a want, just walk away. If it’s a need, then buy it,” Orman writes in the August/September AARP Magazine. “Try this for six months and you’ll be shocked at how easy it is and how much money you’ll save.”
She also recommends trying to live off only your income for the first 10 years of your retirement while leaving investments untouched.
“This money-management plan might seem cautious compared with the 4 percent rule and other retirement-spending strategies you may be familiar with. But if you spend more while interest rates are low or the stock market is in deep decline, I think you’ll run through your savings too fast,” she adds.
Formulating any smart strategy always includes consulting with a reputable certified financial advisor and tax accountant, although a good way to begin is by accessing the wealth of information available at your fingertips.
“There is a multitude of tools on the internet and we have a whole suite of tools on our website at aarp.org that people should go to when they try to make some baseline assumptions. Then if they need to, they should obtain professional help as well to help them reach their goals. This is not something to be taken lightly,” says Fahey.
But while you’re firing up the calculator, crunching the numbers, and completing the worksheets, don’t forget this age-old advice: If you want to feel rich, just count the things you have in life that money can’t buy.
Four Tips for Smart Retirement Money Management
Although many retirees have been diligent and disciplined about saving for retirement, they often have difficulty knowing how to allocate their hard-earned assets once they get there, says financial advisor Marilyn Timbers for the CNBC-TV network. Seasoned citizens are worried about running out of cash while at the same time they risk becoming spenders without bringing in additional income. Timbers offers these tips for retirees to reach balance so they may enjoy their golden years with peace of mind:
1. Draw up a realistic spending plan.
2. Determine a drawdown strategy that aligns with it.
3. Keep in mind that unexpected events probably will take place, so be sure your savings are diversified.
4. Protect your legacy by drawing up a will and/or living trust, and keep your beneficiaries list up to date.