The financial press has bombarded us with stories about the sorry state of retirement readiness here in the U.S. A previous post on this blog featured an info graphic on the retirement savings crisis. All of this is good in that it highlights the need for us to plan and save for our retirement because nobody else will do it for us. However the only retirement readiness statistic that matters is yours. Where do you stand in terms of being ready for retirement and what are you doing to get there?
Rules of Thumb
Retirement rules of thumb can be helpful, but they should not be confused with a financial plan. The 4% rule, for example says that you can withdraw roughly 4% of your nest egg annually for 30 years of retirement and have a reasonable amount of security that you will not outlive this money. This can be helpful in estimating how much you might need to accumulate at retirement. For example 4% of $2 million would give you an $80,000 per year withdrawal.
The problem with using rules of thumb is that everyone’s situation is a bit different. How will invest the money? Will the markets tank early on in your retirement? Will your cash needs be roughly even throughout retirement?
You are far better off to do a detailed financial plan to get you to and through retirement. Just like anything else, you will want to look at all sources of income, your desired lifestyle, your health situation, your indebtedness, and a myriad of other factors. Ultimately you will need to determine the cash flow level that all of your retirement resources are likely to support. The answer may or may not be to your liking but at least you’ll know where you stand.
Steps to plan and save for retirement
If you are still working and saving for retirement here is a list of some of the things you should be doing to get ready:
- Contribute to a retirement plan. Ideally your employer offers a decent 401(k) plan or similar retirement plan and this is an easy, painless way to save for retirement. Even if your 401(k) plan is lousy it still generally makes sense to contribute at least enough to earn the full employer match if one is offered. Further unless your plan is pretty awful it probably makes sense to defer as much of your salary as possible because of the ease of doing so. It’s always harder to write a check, saving on auto-pilot is much more convenient and you are unlikely to miss the money.
- Start your own retirement plan if you are self-employed. A SEP-IRA or a Solo 401(k) can be great vehicles and both can be established quite easily. If you are a high earner you might even consider a pension plan.
- Don’t forget about an IRA. Depending upon your circumstances IRA contributions may be made with pre-tax dollars. You may have the option to make a Roth contribution as well.
- Take affirmative steps with an old 401(k) when leaving a company. Roll it over to an IRA, leave it with your old employer, or roll it into your new employer’s plan if applicable. Make a decision; don’t just let fear, apprehension, or laziness guide your actions.
- Watch your spending and take it easy on debt.
- Have a financial plan in place, revisit and update that plan periodically. You financial plan should be the foundation of your retirement planning. Your plan should guide your investment strategy and help you gauge your progress toward your accumulation goals.
- Manage all of your investments as a consolidated portfolio. There may be several accounts such as his and hers 401(k) plans, some IRAs, taxable accounts, and the like. One reason I suggest consolidating old accounts when possible is simply that it makes your portfolio easier to manage.
- Fund your retirement first and your kid’s college education second. Frankly there are lots of resources for top students and worst case they borrow some of the money. You don’t get a second chance at retirement and your kids with thank you for not being a financial burden on them.
- Manage your insurance needs. Life insurance can provide a bridge into retirement in the event of an untimely and early death or one spouse. Disability insurance is even more important in that it allows the continuation of a lifestyle in the event of a disability. Often because of disability insurance families have been able to continue their lifestyle and a comfortable retirement is still possible.
This is hardly an exhaustive list but these suggestions will help get you on the road to being a positive retirement readiness statistic.
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