Planning Now to Pay for Those Retirement Dreams
"If only I knew then what I know now." We've all heard some variation of that familiar muttering. It illustrates a sentiment many of us face as we begin to understand that we are no longer the 10-foot tall, bullet proof beast of our youth.
When we find our attention turning to thoughts of retiring, of doing the things we've always dreamed of doing, that's when too many of us lament, "If only I knew then what I know now."
Retirement Planning Is Not Optional
The days of parents living to a ripe old age in their child's home, where they receive supportive physical, emotional and financial assistance until quietly passing from this life, are mostly gone. Today's retirees need to have plans in place to assure they have a place to live, funds to support themselves financially and a means to pay for medical care, including long-term care, should it become necessary.
Imagine retirement as the cherry on top of life's sundae when looking toward your "golden years." Today's future seniors tend to have a lifestyle in mind when they think of retirement. They also know that having the means to live that lifestyle rests squarely at their own feet. That means planning is in order.
American society is "graying." Population predictions put the over 65 age group at almost 87 million by 2050. America's senior population is living longer but not necessarily working longer. In fact, the current average retirement age is 61. The Social Security Administration's ability to fulfill its obligations through the next 40 years is questionable. That fact alone should be enough to justify the time taken to plan for retirement.
To make certain you can live the retirement life you dream about, retirement planning should begin as early as possible. The very first day we enter the workforce should be the first day that we begin implementing our retirement plan.
Planning Your Retirement Income Stream
Once you retire, the way you've managed your finances over the years will probably no longer apply. In retirement, you may no longer earn money from work, or your earnings are dramatically reduced.
Retirement planning doesn't mean you pay for your lifestyle by drawing out a portion of your savings each month. The goal is to create a predictable income in retirement out of what we've amassed over our working lifetime.
How to go about that will most likely depend on who you talk to about it. If you aren't particularly savvy economically, seeking the advice of a retirement planning professional is a good idea. There are a couple of general guidelines, however, that apply to just about any retirement planning strategy.
- Plan for two to five years of income in cash or cash equivalents
- Consider an income source of 20 to 50 percent drawing from equity sources
- Set up a stock-heavy investment portfolio to support expenses later in retirement, perhaps 10 to 15 years into your retirement
Retirement Planning Strategies
If your plan is solid, you should pay for your essentials in retirement with predictable income without needing to sell more volatile assets to cover your bills.
- Predictable income sources for covering essentials. Examples of predictable income sources include pension payments, Social Security, interest income, annuities, short-term bonds and cash kept in reserve. These are the income sources you should use to cover regular costs such as housing, car payments, food and utilities. Earmarking these income sources for essentials alleviates the need to sell other assets when the market is down.
- Source discretionary spending from fluctuating income sources. Want to take a cruise or long-awaited vacation? Want to gift a charity or help a grandchild with college? Fluctuating income sources, such as stock dividends, exchange-traded funds, distributions from mutual funds or the proceeds from selling other investments, should fund these types of discretionary spending.
- Get the most out of Social Security. Your monthly draw from Social Security will be significantly higher if you forego claiming it until reaching your maximum retirement age. You'll take a noticeable hit if you begin drawing your Social Security at age 62.
- Get creative with income sources. The tried-and-true investments like stocks, annuities, bonds and real estate can generate income in your retirement years. But there are other more creative opportunities that can be just as lucrative and long-lasting. Look for small business opportunities in which you can invest. These may throw off just enough income to keep you on solid ground. Determine your degree of direct involvement in the business before making a purchase, of course.
- Don't forget the tax man. Taxes are a very real part of retirement, just as they are in our younger years. Taxes on savings and withdrawals from investments can quickly become complicated, so consider engaging the services of a retirement tax professional.
- Update your retirement plan. One of the simplest steps you can take toward a financially solid retirement is creating a detailed retirement plan. This is where a good financial planner can come in quite handy. You'll need to assess what you have and what you'll need as the years go by. Consider what you may want to spend and consider scenarios that could potentially sabotage your plans. Then create an income plan to meet your expected, and unexpected, demands of the future. Update your plan accordingly, with an annual review with your financial adviser.
The End Game
The challenge in retirement planning is to figure out the best way to convert your pile of accumulated savings over your lifetime into a monthly income stream that won't dry up as you age. Use what you know now to prepare for what you'll need then.