7 Steps for Successful Retirement
Achieving your financial goals doesn’t just happen by itself. It takes a plan, implementing the plan, adhering to the plan, and when necessary, adjusting the plan. The best plan starts with a solid foundation based on our 4 V's; Your Values, Visions,
Velocity and Versatility.
Simply put, failing to plan is planning to fail. Don’t plan to fail!
According to the [[www.dol.gov/sites/dolgov/files/ebsa/about-ebsa/our-activities/resource-center/publications/top-10-ways-to-prepare-for-retirement.pdf Department of Labor]], Only 40% of Americans have calculated how much they need to save for retirement. In 2018, almost 30% of private industry workers with access to a 401(k) plan or something similar did not participate.
The average American spends roughly 20 - 30 years in retirement. Nearly everyone will receive Social Security, but Social Security won’t pay all the bills.
1. Regularly saving is critical. Once you begin an automatic payroll deduction into a retirement account, you won’t miss it. I promise. When I first started saving my initial goal was to put 10% of pretax income in my plan.
But that seemed like a mighty big chunk of cash, at least in the beginning. So, I started with 4%, raised it to 7% after three months, and bumped it up to 10% three months later. Taking baby steps was much easier than attempting to summit the peak in one leap.
Todays retirement plans have the option to automatically increase contributions, check with your employer to determine if this is offered.
If you have access to a qualified retirement plan, I can’t overly emphasize the importance of capturing your entire company’s (institution’s) match. It’s free money.
Don’t leave free cash with your employer.
2. Start as early as you can. It won’t be long before your daughter or son graduates from college. In their mind, retirement is another planet, if not another universe. That’s the case for many young people. And I've seen many adults too who think its far away. But we all know the magic of compounding. The savings we socked away when we were younger has paid big dividends.
3. What plan best fits my need? That question will depend on your personal circumstances. For many, your company’s 401(k) is tailor-made to save for retirement. This is especially true if your firm has a matching contribution.
Whether to fund a traditional IRA or a Roth IRA depends on many factors, including your marginal tax rate today and expected rate in retirement.
A Roth offers tax advantages if you qualify. Generally speaking, withdrawals from a Roth IRA are tax-free in retirement if you are age 59½ or older and have held the account for five years. But you won’t capture a tax deduction on contributions. But those contributions will earn money which will grow tax free if you do the aforementioned.
Current tax law does not require minimum distributions on Roth IRA’s, which can be a big advantage as you travel through retirement. If you are subject to the tax torpedo of social security, this could be a big benefit down the road of retirement.
A Roth may also be advantageous if you do not believe your marginal tax rate will fall much in retirement or if you have outside assets that limit your need to withdraw on your retirement savings.
4. How much will I need at retirement? Ah, the $1,000,000 question, or is it? Again, much will depend on your individual circumstances. Your retirement expenses and lifestyle will dictate your portfolio needs.
An old rule of thumb that you’ll need 70% - 80% of pre-retirement income may not suffice for many. For example, will you still be paying on a mortgage after you retire? You certainly won't be contributing to a retirement plan. Or, do you plan to downsize, which may reduce or eliminate monthly mortgage outlays?
One approach some folks consider is the 4% rule. It’s relatively simple. Withdraw 4% of your total investments in the first year and adjust each year for inflation. Keep in mind, however, that this is a rigid rule. It assumes a 30-year time horizon and minimizes the risk of running out of money. There are other withdrawal rules which may be more applicable to your specific circumstances. Beware of this rule in times of market downturns.