Choosing a retirement plan can be one of the most important decisions you make as you map out your financial future. Especially now, when Social Security again appears to be in jeopardy while defined benefit plans are already on their way out, a need for reliable options for working people is pertinent as ever. Unfortunately, too many employees put off thoughts of retirement as unfeasible or premature. Lack of planning often leads to hasty decision-making when the time comes to make vital choices about life after work.
That’s why default options are extremely useful for employers to introduce. Simply put, their implementation demonstrates a commitment to the well-being of the workforce that can pay off greatly in the long run. Lifetime Income Default Options offer their recipients a fixed rate of income during the years after retirement, with the option to opt out of the program rather than the need to opt in. Since many people underestimate how long they will live after they retire (and therefore don’t plan on having as much money), this option, helps provide a long-term safety net.
The major dilemma of retirement planning, income level vs. liquidity, is a choice not to be taken lightly. Some people may not be aware of it, but these lifetime income options offer a sort of compromise. To begin, their money is placed into a diversified fund that readjusts along with the market, so income level stays steady while their savings are accrued, then at a preset time (usually at age 48) allocations to a deferred annuity begin, with full conversion achieved about a decade later. This gradual approach helps to neutralize changes coming from interest rate adjustments, typically a driving force in annuity price changes.
The strategy assures employees that they will receive a baseline amount of income in retirement. If they choose, they can adjust their level of savings as they see fit. This saves them from getting locked into a strict amount and gives them the flexibility to spend the amount of money they feel most comfortable with.
These plans have already generated a great deal of interest that only looks to gain more momentum as the word spreads. It’s important not to let stagnation or complacency with existing, less than adequate plans get in the way of your employees’ needs. These plans offer a reliable way for your employees to retire with greater financial stability, and can encourage greater savings pre-retirement. In the end, what’s important is that people are able to use the tools at their disposal for a comfortable and prosperous retirement. A plan that offers employees flexibility while helping to provide for long-term financial safety is a win for them, and a win for you as a leader.
Life is full of unexpected situations that may have required you to pull from your retirement savings to cover pressing, unanticipated expenses. Although such situations can present challenges to the integrity of your retirement fund, there are several things you can do to reinvigorate your savings.
First, identify what caused the drain in your retirement savings. This step may seem obvious, but it’s important to take time to evaluate the factors that led to your emergent situation so that you can take steps to avoid them again in the future. With time and careful consideration, you can prepare for future unexpected situations.
Generally, it is advisable to save cash reserves to cover expenses for anywhere between three and six months. If you’re a homeowner, you should be able to cover six to 12 months. In addition, you should keep the amounts of the deductibles for your homeowners, flood, car, and health insurance. As an added precaution, set aside 1 percent of your home’s value each year for repairs.
Next, cut expenses and prioritize retirement. Because people spend the majority of their careers thinking that retirement is far away, other more immediate expenses often take priority over saving for a seemingly distant eventuality. However, dipping into retirement savings to cover an emergency signals that spending less on lower priority expenses may be necessary in order to recoup your losses. To help you accomplish this, refer back to the first step and evaluate what expenses you can minimize or maybe live without (at least for a while). Finding tax preferential vehicles such as municipal bonds, MLPs, and real estate in addition to the retirement accounts you already hold can help you get back on track as well.
Start saving small amounts to develop good saving habits and begin replenishing your retirement fund. Easing into monthly saving can help you get your retirement savings back on track without presenting you with a harsh burden. Starting by saving just 1 percent of your annual income in a company retirement plan helps you form a habit of saving. The 1 percent amount is small enough that it won’t be missed but big enough to keep the need to save for retirement fresh in your mind. It also helps you to save more as time goes on. By increasing the amount you save by an addition 1 percent of your income every other month, you will quickly be on your way to substantially rebuilding your retirement savings.
Eventually, you should increase your contributions to company retirement funds to the maximum amounts allowed by your 401(k)s and IRAs. Taking advantage of matching employer contributions will also be beneficial. If you are aged 50 or above, you can also potentially take advantage of up to $1,000 in catch-up IRA contributions and up to $6,000 for catch-up 401(k) contributions.
Pursue an extra job or income-generating side project to help fill in the gap.
Picking up a second job or an extra client or two can help generate additional income that can be set aside for retirement without impacting present-day expenses. If your spouse or partner does not work, having him or her join the workforce can be a great boon. Alternatively, if you are already retired, consider turning a hobby into an income-generating project. Or, apply to a big company, whose employee insurance plan can help cover healthcare costs. However, if you are unable to pursue any of the examples above, even simple things like tutoring or helping neighbors with some yard work can help supplement other income.
Delay retirement and social security to make sure you have more money for later. The best way to improve a retirement portfolio’s longevity is to delay drawing on it. Delaying retirement allows more time to build greater savings and also ensures that saved funds that you have accumulated will last longer into the future because they are being drawn on later in time. If you delay your social security benefits until after retirement age, your benefit grows with each year of delay.
If you’re a homeowner and your home has sizable home equity, consider a reverse mortgage. A reverse mortgage allows people aged 62 and over to receive tax-free cash in a lump sum or fixed payments. Moreover, the mortgage does not need to be paid until the homeowner moves out or dies. However, there are closing costs associated with this type of mortgage, and the homeowner must maintain the home. Although seniors often consider a reverse mortgage to be a last resort, it is a viable option provided that it is obtained from a reputable lender and that the homeowner understands how the mortgage works.
While having plenty of money at your disposal during retirement is a goal for many, it’s not the only secret to happiness and fulfillment during your retirement years. Findings from the 2010 Health and Retirement Study Survey found that life satisfaction for retirees goes beyond income and wealth to include health, retirement decisions, and the quality of their social life.
Making retirement decisions early and working towards these goals could just be the path to happiness for many retirees. Here are some important things to consider when planning your post-retirement career:
Prioritize Your Career
If you managed to set aside a few million dollars through savings and investments during your retirement years, you may not want to explore jobs or a new career. However, if work fulfills you in some way, you will want to secure a position you are interested in and get paid well for given your years of expertise and experience. Results from a Merrill Lynch study found 72 percent of people over the age of 50 want to work in retirement and 37 percent of pre-retirees who want to work in retirement have already taken steps to prepare for their post-retirement career.
Consider Your Earning Potential
If you plan on working full-time during retirement to cover your bills and expenses, you’ll need to evaluate how much you need and what your income potential is based on the current job market. This can be stressful for some — especially if you have been out of the job market for a while — so doing some research, interviewing for different positions and setting some income goals can help you make a decision that’s right for you.
Factor in Socialization Opportunities
Opportunities to socialize may be limited if you end up working from home or stay out of the job market altogether. If you are a surviving spouse and live alone, you may need to be even more proactive about maintaining a healthy social life. Experts say retirees need to participate in social activities to maintain a healthy and meaningful life through retirement and reduce their risk of death. If you aren’t meeting up with friends regularly or staying active in your community in some way, you may be compromising your health and missing out on some valuable opportunities to connect with people. Make sure an active social calendar is part your post-retirement plans.
Review Your Financial Portfolio
Whether you were a diligent saver or an ambitious stock investor during your working years, now is the time to enjoy the fruits of your labor. Meeting with a financial advisor or retirement planner can help you determine whether you are managing your wealth effectively and how to distribute funds. You may be able to buy annuities, make additional profitable investments, and save money with some smart financial moves before and during retirement.
Take Care of Your Health
You may already be taking care of health and medical issues and seeing a physician regularly for checkups. Make sure you’re also taking steps to take care of your health in natural ways, by eating a well-balanced diet and getting regular exercise. Take care of vision exams on schedule, keep up with dental visits, and explore natural health or alternative health remedies to manage stress. Your retirement years will be more fulfilling when you have the physical and mental abilities to enjoy it all. Be proactive about your health, talk to your doctor about wellness plans and take medication on schedule to set yourself up for a healthy lifestyle throughout retirement.
Mapping out your post-retirement plans can be overwhelming but there are several things you can do to set yourself up for years of happiness and satisfaction. From reviewing your financial portfolio to re-entering the workforce, use these tips to set some goals for yourself during your retirement years.
Those most successful at putting money away—whether through savings, investments, or retirement structures—most likely have at least one thing in common: They give regular attention to the picture of their finances and how they are managing them. Much like your physical health, your financial health is dependent upon taking a proactive, rather than a reactive, approach to its maintenance. For most investors this makes sense in theory, but when it comes to the actual implementation there is a lot of noise, all of which can be misleading if taken out of context, especially if the advice doesn’t necessarily pertain to your personal financial picture.
As we always remind our own investors, all good financial advisors will make sure to learn about your individual situation before providing any advice, so take this information with care. However, the four things we list below are crucial pieces of the financial puzzle, which apply to nearly anyone trying to grow wealth, in any amount.
Pay attention to your consumer-debt ratio: While pretty much a given, even the New York Times will tell you that you always want to be earning more than you are spending—probably because it bears reminding in this consumer-drive society. Your consumer debt ratio is determined by dividing your assets by your liabilities. Now, ideally, this number will be positive, indicating that you own more than you owe. More often than you’d think, however, the reverse is true. According to a study by popular Nerd Wallet, the average household is continually growing and currently at about $130,922. With social security disappearing, this is particularly concerning for the younger generations. More on that below.
Create an Emergency Fund: Like a savings account, this money sits aside in the event that you need access to an unusually large amount of liquidity, in a short period of time. The standard emergency fund amount recommended is the equivalent of three months salary, however, if you are a dual income home, make that the equivalent to 6 months of salary. Emergency funds ensure a certain amount of flexibility should something unexpected—a sudden accident or illness, or the need to take time off from work—befall you or your family.
Max out your retirement accounts: This is important at any age, and especially as you get closer to retirement, but its equally if not more important when you are young. In addition to the fact that social security is only guaranteed until 2035, this allows the younger generation to put money away when they don’t need to use it to care for dependents. It also encourages a habit early on, that will ideally compound over a lifetime. It’s also helpful to actively picture what your retirement looks like, so that you have some idea of the type of lifestyle you are saving toward, and what it will cost to support that. For more tips on saving for retirement read “Making the Most of Life After Work.”
Be respectful of inflation: This is true with regard to the national inflation we experience collectively, but should also be taken into account with the natural inflation that occurs in each of our lives as we age. Many people fail to track their earning and spending trajectories based on their future circumstances and situations, which can wreak unexpected havoc when significant shifts in spending are caused due to big life transitions, like moving or having a baby. Planning well in advance of the natural inflation of your life will also be helpful in protecting your financial health.
Credit Score: Of course, we can’t leave out the credit score. While bemoaned for its haunting qualities in many situations, your credit score can very easily be coaxed to work in your favor as long as you treat it right. And these days, it can dip or rise within a matter of days based on your recent financial activity. Some people simply ignore their credit score, allowing it to work entirely to their detriment by not paying attention, but those who are proactive about their rating can do infinitely more good. Just take a look at U.S. News and World Report’s strategies on quickly raising your credit score.
Studies show that those who are cognizant enough of their finances to be able to easily check in on and understand the above are far more likely to experience financial success because they are, in essence, conditioning themselves for it.
Visit Goldstone Financial for more information on how to ensure your financial health.
The great thing about investing and financial management these days is that there is so much information available to investors. This makes it easier for financially savvy individuals to make big strides financially, but it also opens up the potential for a very large amount of misinformation to be passed along as well.
The saying goes, you can’t believe everything you read, and this is especially true when it comes to information in the financial sector. Many individuals and organizations count on people trusting their advice, so that they can make a profit regardless of whether that advice pans out for the investor or not, which results in serious misconceptions regarding best financial practices. These misconceptions range from complex investment deals to simple money saving tactics. If you’re wondering what myths could possibly impact people who are simply trying to save, you’re not alone. There are many who aren’t aware, and fall victim to these common errors. Here are a few pieces of advice to steer clear of, or at least check out with your financial advisor before heeding:
Put all your money into a savings account: A U.S. News & World Report Article points out that “Interest is the primary reason for depositing cash into savings rather than a checking account or stowing it under the mattress. Every effort-free dollar earned via interest is a dollar you won’t have to earn the hard way: working.” To this point, it’s important to consider what the yield is when comparing the interest rates banks offer to other investment options. There may be some with significantly lower yields, which is compounded by the fact that savings accounts cause you to lose money over time because their low interest rates do not keep pace with inflation. Savings accounts also expose people to bank fees and other hidden costs, such as money withdrawal limits on savings and money market accounts.
Whatever you do, cut back on spending: Steve Siebold, author of How Rich People Think, points out that people actually make less progress accumulating wealth when they are focused solely on spending less. The bigger motivator to accumulating wealth is when people concentrate more of their energy on bringing in more money. “The real key is earning,” he says. No matter how much you save, you won’t acquire wealth unless you are making money, not just putting it away.
Follow in Your Parents Footsteps: Okay, so this is the one time your mom might be wrong. What worked for your parents in terms of saving money, might not necessarily work for you. The notion of saving money by investing in real estate and looking to traditional savings accounts to stockpile cash has changed significantly in the past decade. Many individuals, and even many investment firms, are slow to catch on to the changes in the marketplace, as discussed in our blog 60 Years the Same. This is a dangerous trend for individuals who fall prey to their outdated advice.
Pay with Cash: While it’s always important to avoid spending money you don’t have, believe it or not, using credit cards can open you up to potential savings opportunities you wouldn’t be able to take advantage of otherwise. Thanks to points and rewards, you are better of using your cards strategically each month to reap these benefits, as long as you can pay your balance off at the end of each term.
Saving isn’t necessary until later in life: Many young people starting out their careers fall into a pattern of living paycheck-to-paycheck, convincing themselves that they have their entire lives to save for retirement. While this may be true, it doesn’t account for the fact that the money you save—if invested properly—can compound at a much greater percentage the earlier you begin putting it away.
When it comes down to it, all these myths point to some very real shifts in the financial marketplace. The myth really lies in the idea that saving money will help you make money. It won’t. While it might prevent you from spending what you have, by comparison to other options it misses the mark on what your money can do for you when it’s not being spent. Standard savings accounts aren’t necessarily the best way to “store” your money, when it could have much greater returns living elsewhere.
A good financial advisor will not only keep you abreast of any misguided information, he or she will also be proactive about helping you realize when your money isn’t performing as well as it should. In most cases, keeping your money in a savings account or falling into one of the other misguided notions above can actually keep you from making money. One of our priorities at Goldstone Financial is helping our clients review the decisions they’ve made in the past with regard to their finances, as well as those they will make in the future. We are incredibly hands-on in the process of helping clients determine whether their sources of information are reliable, and good choices for their specific goals, at the given moment in time.