Planning for a Secure Retirement
Retirement planning has always been full of uncertainties: How much longer will you be able to work? How much savings will you have when you stop working? How many decades will that money need to last? But for anyone nearing retirement, or already there, the level of uncertainty has rarely been greater than it is right now.
Most significantly, Congress and the White House have been overhauling many rules that have a big impact on consumers generally and retirement savers in particular. One of the most sweeping changes is the new tax law that will greatly limit deductions and other breaks. That could have a major impact on your taxable income.
Investing is also more challenging. After a nine-year bull run, the benchmark Standard & Poor’s 500 stock index is at record highs, so returns are likely to be lower in the years ahead. “There’s a growing risk of a market correction in the future,” says David Blanchett, director of retirement research at Morningstar, an investment research firm.
Don’t let these worries paralyze you. “The most important thing people can do is control what is controllable,” says Andrew Jamison, a certified financial planner with Main Avenue Financial Services in Beaverton, Ore. And the truth is, the things you can control—your day-to-day saving, investing, and planning decisions—are what’s most critical to your retirement success.
Whether you are still working and plowing money into your 401(k), or enjoying your retirement now, here are smart strategies that will help ensure your financial security.
Below you can read about three phases of retirement planning, starting with when you’re 50 to your early 60s, then from when you’re 60 to your early 70s, and from when you’re 70 and older.
Working and Saving: 50 to Early 60s
On average, men claim retirement benefits at age 64.2 and women at 64, Social Security data show. For nearly half, retirement comes sooner than expected, often because of poor health or a layoff, according to a 2017 report by the Employee Benefit Research Institute. But nearly a third of retirees leave their job because they can afford to. To improve the odds that you can retire on your own schedule, follow these steps.
Assess Your Assets
Add up your retirement savings to see whether you’re on track to meet your retirement goals. As a benchmark, at 50 years old someone seeking to retire at age 65 should have stashed away the equivalent of 5.2 times their household income in financial assets, according to financial adviser Charles Farrell, J.D., LL.M., author of “Your Money Ratios” (2010, Avery). So if you’re 50 years old and earning $100,000, having a $520,000 portfolio would leave you in good shape. (This calculation assumes you’ll be living on about 80 percent of your preretirement income, including Social Security benefits.) Use an online tool, such as the T. Rowe Price Retirement Income Calculator, to see how your savings stack up.
Boost Your Savings
If you’re falling behind on savings but you’re still working, ramp up now by making the most of tax-advantaged retirement plans. Max out your 401(k) if you can—you can stash away as much as $18,500 in 2018; those 50 and older can put away $6,000 more in catch-up contributions.
Don’t have an employer plan? Opt for an individual retirement account. You can save up to $5,500 per year in an IRA, plus a $1,000 catch-up contribution for those 50 and older. A traditional IRA lets you save pretax; a Roth IRA lets you put away after-tax dollars that grow tax-free. If you have any extra savings, put money in a taxable account.
Of course, saving more requires cutting back on your spending. But there’s a double benefit to doing that, says certified financial planner Michael Kitces, director of wealth management at Pinnacle Advisory Group in Columbia, Md. By living a more frugal lifestyle, you not only free up savings but also won’t need as much money to live on in retirement because your scaled-down spending has become your new normal. So consider downsizing your house now that the kids have moved out, or cook more at home rather than eating out. These savings will make reaching your retirement goals more doable.
Consider Your Longevity
If you need more incentive to save, think about how long your money will have to last in retirement—it could be two decades or longer. According to the Social Security Administration, the average 65-year-old man today is expected to live until 84.3, and a 65-year-old woman to 86.6. If you’re a couple, one of you has a 47 percent chance of living until age 90.
Understand Your Spending
Once you have a rough idea of how long your money will need to last, you can create a retirement budget. Start by tracking what you’re spending now, using software such as Mint or YNAB. “Most people have no idea where their money is going,” says Scott Cole, a certified financial planner in Birmingham, Ala., “so this process helps clarify.”
With a budget in hand, you can think about ways that spending might shift in retirement. Many financial planners suggest you aim to replace 70 to 80 percent of your preretirement income, assuming that retirees usually spend less. But many people spend as much as they did before because of higher travel and entertainment expenses, especially in the early retirement years. Spending tends to drop off in the middle phase of retirement, only to rise in later years as healthcare expenses increase—a pattern that Morning star’s Blanchett calls the “retirement spending smile.”