Jane Young, CFP, EA
In our 50’s we still have time to plan and save for retirement and it’s close enough that we can envision ourselves in retirement. Below are some things to address as you plan for retirement.
- Set some goals and make plans, what does your retirement look like? Consider your path to retirement and your timeframe – you can gradually transition by working fewer hours in your current job, work part time in a new career field or completely stop working. Think about how you will spend your time in retirement. Work usually provides us with mental stimulation, a sense of purpose and accomplishment, social interaction and a sense of identity. How will you meet these needs in retirement?
- Evaluate your current situation. Take a thorough look at current expenses and assets. Analyze your spending habits and compare this to your earnings. Look for opportunities to save money to invest and prepare for retirement.
- Ramp up savings and maximize your retirement contributions – try to save at least 10% to 15% of your annual income. Increase contributions to your 401k and IRA to take advantage of catch-up provisions. These are your highest earning years where you can really benefit from investing in tax deferred retirement plans.
- Invest in a diversified portfolio that will grow and keep up with inflation. Your retirement savings is long term money that will need to last another 30 – 40 years. A reasonable portion of this money should be invested in stock mutual funds to provide you the growth needed to carry you through retirement.
- Take steps to reduce your retirement expenses – pay off high interest debt, credit cards and vehicle loans. Make extra payments on your mortgage to pay it off around the time you retire.
- Think about where and how you want to live. Do you want to move to a lower cost area or downsize to a smaller home? Put plans in place to meet your goals. Complete major remodeling, repairs and upgrades on appliances before you go into retirement.
- Develop a retirement budget. Consider the impact of inflation and taxes on your monthly outflow. Many retirees are more active and spend more early in retirement. Include expenses for health care and long term care in your budget.
- Evaluate your Social Security options. Delay taking Social Security benefits as long as possible, up to age 70.
- Calculate how much you need to pull from your retirement savings by subtracting your monthly expenses from your Social Security and pension benefits. As a rule of thumb, avoid spending more than about 4% of your retirement savings per year. This will vary with the amount of risk you are comfortable taking in your portfolio. To get a more precise projection on when you can retire, how much you can spend and how much you should save, periodically work with a financial planner on some formal retirement planning.
Jane Young, CFP, EA
We recently built a new home and have been feverishly working on landscaping and planting new flower beds. While going through the process of planting and nurturing my flower gardens I realized there are many similarities between gardening and investing. I planted a lot of perennials to create a garden that will last for many years. However, I’m anxious for the perennials to grow into the large, colorful flowers I have envisioned. I realize it takes time and patience to develop a gorgeous garden. To satiate my immediate need for some color I interspersed some annuals with the perennials. The annuals will meet my short term needs but aren’t a good long term investment. They will provide beautiful color this year but will die and won’t return next spring
To build a successful garden you have to plan ahead, prepare the earth and plant seeds long before reaping the benefits. Investing is similar to gardening in that you need to think ahead to create a plan that will meet your long term objectives. You have to start by planting the seeds and continue feeding and nurturing your investment plan. After your initial investment is made, continue making contributions and annually re-balance your portfolio to be sure you stay on track. Periodically some weeding is required to remove poor performing or inappropriate investments from your portfolio. You may also need to add some nutrients by adding better performing mutual funds or by expanding on the categories of funds in which you are invested.
It’s essential to meet short term needs. This year I had a short term need for some annuals to add color to the garden. In your portfolio, you need to include short term money for emergencies and living expenses. If short term needs are addressed you can invest your long term money more effectively with greater confidence.
Additionally, in both gardening and investing it’s important to stay diversified. My garden has a variety of flowers that bloom at different times of the year or react differently to varying weather conditions. Your portfolio should also be diversified with a variety of different investments that help you buffer against a variety of market conditions and changes in your personal life.
Just like perennials in the garden, investments in your portfolio need time to grow and absorb fluctuations in the market. If you become impatient and give up before they have time to fully bloom you won’t meet your end goal. Just as vibrant short term annuals can provide a lot of immediate satisfaction they don’t result in a garden that is sustainable over many years.
Investing, as in gardening, is a slow and steady process. Get started, set a plan, keep a long term perspective and stick to your plan. Patience and perseverance will help you build a gorgeous garden and a more secure financial future.