Whether you’re still working or already retired, these steps will help you enjoy your retirement years to the fullest
By Patricia Wuest
Saving for retirement can be challenging and confusing, but if you develop a strategy that’s tailored to your needs and wants — even after retiring — you can ensure a financially secure retirement. After all, you want to spend this time of your life doing what you want, so it’s important to develop a financial strategy that will enable that — and then stick to it.
“To create meaningful engagement in pension planning, a plan provider should begin by asking employees not about risk but about their expectations for income needs in retirement,” writes the 1997 recipient of the Nobel Prize in Economic Sciences and professor at the MIT Sloan School of Management Robert C. Merton, in “The Crisis in Retirement Planning” published in 2014 by the Harvard Business Review (https://hbr.org/2014/07/the-crisis-in-retirement-planning).
How do you determine your income needs, and then stick to a plan for meeting them? Follow these steps.
IF YOU ARE STILL WORKING
- A retirement calculator can help you determine how much income you need to retire comfortably. You may also want to seek the advice of a financial advisor.
- Figure out your retirement income needs and wants. Merton recommends dividing your income needs into three categories (if you’re one-half of a couple, do this together):
1) Minimum guaranteed retirement income. “Income in this category must be inflation-protected and guaranteed for life, thus shielding the retiree from longevity risk, interest rate fluctuations, and inflation,” writes Merton. Two common income sources for this category are Social Security and lifetime annuities. In other words, figure out how much income you need to cover your essential needs. These expenses include food, clothing, housing, transportation and health care. Make sure your retirement assets are allocated to guarantee this income for as long as you live (the retirement calculator comes in handy for figuring this out).
2) Flexible income. This income isn’t necessary for your baseline household income needs, but they are expenses you would like to be able to afford. In many cases, though, you’ll find that these needs are closer to your basic needs than your nice-to-have ones — such as travel expenses to visit grandchildren that live in a different state or money for a favorite pastime, hobby or activity such as fishing. Merton says that conservatively invested assets, such as a portfolio of U.S. Treasury Inflation-Protected Securities (“TIPS”), can provide an income stream “in whole or in part to the participant at any time, for medical emergencies or other lump sum expenditures.”
3) Desired, nice-to-have income. Maybe travel to a destination like Italy or getting a new car are not something you absolutely need, but after all, you’ve worked hard all your life, so a splurge once in a while during your retirement years would be nice, wouldn’t it? You can take some risks with investments in order to create the income for this category. “Some participants may find that their anticipated total income and assets will not be enough to finance the level of retirement income they desire,” writes Merton. “In that case they may wish to accept lower income now (that is, increase savings) or invest a portion of their DC [defined-contribution] accumulations in risky assets that hold out the possibility of earning sufficient returns to permit achieving the desired higher retirement income.”
- Make compound interest work for you, especially if you’re making up for lost time. If you save $200 a week from age 45 to age 65, you’ll accumulate about $510,000 if you get an 8% average annual return.
- Increase your retirement savings by decreasing household expenses. Take advantage of catch-up contributions available to to those who are age 50+ for individual retirement accounts (IRAs) and the Thrift Savings Plan.
- Pay off your mortgage before retirement. Also pay off any other debt you have, such as credit card and college loan debt. Pay cash for your purchases, and if you don’t have the money now, delay the purchase until you do have the money. Getting rid of debt now means more financial freedom when you’re retired.
- Keep adjusting your finances as life events occur. If you haven’t already written a will, do it now. Review your life insurance needs and beneficiary designations periodically.
IF YOU ARE RETIRING OR ARE ALREADY RETIRED
- Create a “retirement paycheck” with withdrawals from invested assets. Most experts advise withdrawing no more than 4% to 4.5% of assets annually to ensure that you will not outlive your money. Adjust this amount annually to account for inflation.
- As a hedge against inflation, keep some stock in your investment portfolio throughout retirement.
- Beginning at age 70½, take required minimum distributions from retirement savings from tax-deferred retirement savings plans.
- Adjust your finances as life events occur. For example, transfer untitled personal property to heirs and purchase of long-term care insurance.
Merton writes: “The primary concern of the saver remains what it always has been: Will I have sufficient income in retirement to live comfortably?” By taking these steps and adopting these strategies, you will increase your chances of meeting your retirement goals.