Financial Planning: 6 Tips For A Comfortable Retirement
- Don’t underestimate your time horizon. No matter how much you save, it won’t be enough if you’re not realistic about how long it will need to last. According to the Society of Actuaries, a healthy 65-year-old man has a 50 percent chance of living to age 85 and a 25 percent chance of living to age 92. For women, the ages are 88 and 94, respectively. For a healthy, 65-year-old couple, there’s a 50 percent chance that at least one spouse will live to age 92 and a 25 percent chance that at least one spouse will live to age 97.
In other words, if you’re retiring today, the odds are good that you’ll need your savings to last 20 to 30 years, and these numbers will likely continue to rise in the future.
- Look at the right numbers. When evaluating their investment portfolios and other retirement savings, people all too often focus on the rates of return they’re earning. But while investment performance is important, these numbers won’t tell you whether you’re on track to achieve your retirement goals. A 12 percent return doesn’t mean much if you’re likely to run out of money before you reach age 80.
The right approach is to look at the savings you have now, determine how much you’ll need to finance your desired lifestyle in retirement and develop a strategy for getting there. This information will empower you to make informed decisions. Suppose, for example, that you’re on target to exceed your retirement goals. You might shift some of your portfolio into less risky investments that yield more modest returns, or you might stay the course and strive for an even more comfortable lifestyle in retirement.
If you find that you’re falling short of your retirement goals, you have several options: You can 1) set aside more of your income for retirement, 2) take on additional risk in an effort to boost your savings, 3) adjust your goals and plan to live more frugally during retirement, or 4) delay retirement to give yourself more time to build up your nest egg.
There’s no one right strategy. It depends on your particular needs, time horizon and tolerance for risk. But you won’t be in a position to make these decisions unless you have the right information.
- Expect the unexpected. When budgeting for retirement or other financial goals, don’t just estimate your income and regular expenses. Build in a cushion of liquid funds for unexpected financial challenges, such as medical expenses, long-term care or emergency home repairs.
- Take a balanced approach. A basic principle of sound investing is to have a well-balanced portfolio. By diversifying your investments across different asset classes, funds, companies, industries, sectors and geographical regions, you minimize the risk that poor performance in one area will have an adverse impact on your portfolio as a whole.
It’s also important to strike a balance between equity, debt and cash. Generally, stocks are riskier than bonds and cash-equivalent investments, but they also offer substantially higher returns.
- Pay off debt. When considering your investment options, don’t overlook the benefits of paying down credit card or mortgage debt. Suppose, for example, that you pay the $10,000 balance on a credit card that charges 12 percent interest. Avoiding the interest payments produces greater benefits than putting the same $10,000 in an investment that yields a 12 percent return. Why? Because 1) paying off credit card debt yields risk-free returns, and 2) returns on other investments will be reduced by income taxes (unless they’re tax-exempt).
- Start early. It may seem obvious, but the earlier you start planning — ideally no less than seven to 10 years before your planned retirement date — the greater your chances of achieving your retirement goals. Not only does starting early give you more time to save, but it also allows you to boost your returns while maintaining an acceptable level of risk. As your time horizon increases, short-term price swings become less of a concern, allowing you to invest more aggressively in stocks. As you approach retirement, you should gradually shift your portfolio toward bonds and cash-equivalents in order to reduce risk and increase liquidity.
Review your plan regularly
Regardless of how carefully you plan, it’s critical to monitor your financial situation closely. Over time, market movements may change your portfolio’s investment mix, affecting your risk, or your personal circumstances may change. To make sure you stay on target, review your plan periodically, revisit your retirement goals, and adjust your portfolio or your investment strategies accordingly.
Ryan Sullivan has over 12 years of experience as a financial advisor. As Principal-in-Charge of Rehmann Retirement Builders, he is directly responsible for supervising the management that services over 1,000 retirement plan clients.
Securities offered through Royal Alliance Associates, member FINRA/SIPC. Investment advisory services offered through Rehmann Financial, a Registered Investment Advisor not affiliated with Royal Alliance Associates.