Author: Chuck Saletta | March 29, 2019
Retirement planning is a life-long journey
Retirement planning is a journey that starts the day you accept your first paying job, and it continues throughout the rest of your life. It involves your money, your time, your family, and your hopes for your future.
As a result of that long-term nature, everyone’s path to and through retirement is different. Still there are several great rules of thumb to live by as you embark on your way there. These 12 retirement rules can help guide you to make the most of your own path, no matter which particular route you take.
No. 1: Always have a long-term plan
Around half of retirees start Social Security via a disability or at age 62, the youngest age you can claim retirement benefits. According to Social Security’s life expectancy table, a typical 62 year old man can expect to live around another 20 years, and a typical 62 year old woman can expect to live nearly another 23 years. Even then, if you make it to age 82, the typical person at that age can expect to have another seven or eight years from that point forward. That longevity calls for long-term thinking.
Few of us know exactly how long we will live. As a result, it’s a decent idea to build a plan that has a good shot of lasting long enough to take you throughout your golden years and maybe have a little leftover. That gives you the added bonus of potentially being able to leave a financial legacy behind once you’ve passed. With a long-term focus at any age, you can set yourself up to not just care for yourself, but also help support your family or a charity that means a lot to you, long after you’ve left this world.
No. 2: Build a good ground game to cover your near-term needs
Once you get close to retirement, you need to get at least part of your portfolio out of stocks and focused on shorter-term, higher-certainty investments. While that move will likely lower the rate of return you can expect on that portion of your money, it does provide you with better assurances your money will be there when you need it. While the stock market’s general trend has been upwards, there are no guarantees it will be up when you need to pull money out of your accounts to spend.
How much money you should move out of stocks depends on a few key factors. First, a great guideline is that you should not have money invested in stocks that you expect to spend in the next five years. So start by estimating your spending needs in retirement and how much of that money needs to come from your portfolio. As a result, five years’ worth of that portfolio-covered spending is a good lower goal for the minimum you should have outside of stocks once you reach retirement.
On the flip side, the problem with shorter-term, higher-certainty investments is that they are generally well suited to provide a return of your money rather than a return on your money. Since you will also have longer term plans for your money, even as a retiree, you should keep a decent amount of it invested in stocks. Unless you’ve saved substantially more than you need, keeping more than 10 years of expenses outside of stocks is probably overkill, and around seven years is likely the sweet spot.
No. 3: Recognize what Social Security will do for you
Your Social Security benefit is personalized based on your income levels across your 35 highest years of income from covered sources throughout your career. As a result, the best estimate for how much you can expect from the program can be found from Social Security itself. If you sign up for a My Social Security account on Social Security’s web site, you can get your personalized benefit estimate from the program.
Of course, you may have heard that Social Security is in long-term financial trouble. That is true, but it’s important to note that even if Congress does nothing, Social Security will still be able to pay around 79% of its currently promised benefits once the program’s trust funds empty around 2034. Even over longer time periods, estimates are that it still will be able to cover around 74% of its promised benefits. As a result, planning around receiving 75% of your projected Social Security benefit is a decent starting point.
No. 4: Realize that even when paying full benefits, Social Security is limited
Even if Social Security remains capable of delivering its currently promised benefits, those benefits are much smaller than you may initially think. The program targets benefits around 40% of a typical retiree’s salary, less if you were a high earner. And that benefit level only kicks in if you wait until your full retirement age before collecting. If you retire and start collecting early, your benefits are permanently reduced.
Indeed, the average retired Social Security recipient sees a monthly benefit of around $1,464 per month, or around $17,568 per year. That’s before Medicare premiums, which start at $135.50 per month for Part B coverage, are deducted, leaving even less to cover everyday living expenses. A typical Social Security benefit is enough to keep someone out of abject poverty, but it really doesn’t provide much more than that.
No. 5: Know how your pension interacts with Social Security
If you’re among the few employees that still qualify for a pension, you should be aware that your pension and your Social Security benefits probably won’t completely stack on top of each other. For instance, if you switched jobs between one that paid into Social Security and a public sector one that didn’t, your Social Security benefit will likely be reduced by the pension you receive from that other employer.
On the other side, if you are covered by a private pension, that pension may very well be considered “integrated” with Social Security. In an integrated pension, your Social Security benefit is taken into account with regards to how much your pension will pay. As a result, your total benefit between Social Security and that pension will be less than that total of each would be on its own. That’s important to consider when determining how much you’ll need to save on your own to cover your retirement.
No. 6: The earlier you get started saving, the easier it is to reach your goal
No matter what your savings target is, the earlier in your career you get started saving for it, the easier and cheaper it is for you to reach your goal. Indeed, compounding has often been called the eighth wonder of the world for the amazing results it can generate over time.
The table below illustrates just how powerful a force compounding can be. It shows how much you need to save each month to wind up with $1,000,000 in retirement, based on the number of years you save and the rate of return you earn. If you think it’s hard to come up with the amounts in the top rows of the table early in your career, imagine how much harder it will be to go from $0 to the amounts in the bottom rows later in your career.
No. 7: Your employer’s stock is a terrible choice for your retirement savings
You may work for the greatest company on the planet. Its stock might be a wonderful investment overall. You may get shares and/or options as part of your compensation package. All of that is fine, and you should never turn down compensation just because it comes in the form of the company’s stock. Still, it’s a bad idea to put your own retirement investments in your employer’s stock, even if it’s available to buy in your company-sponsored retirement plan.
The reason is simple -- if the company runs into trouble and you’re over-invested in it, you could find yourself out of a job and a substantial portion of your retirement savings at the same time. If it happens early in your career, you may still have time to recover, but you’ll also be less likely to have other resources to fall back on until you find another job. If it happens late in your career, you may have more money to get you through an employment gap, but your long-term financial health would be at risk.
No. 8: Proper diversification is even more important for retirees
Done right, diversification is the closest thing to a free lunch available to investors. What proper diversification can do for you is lower the impact of a colossal failure within your portfolio without affecting the overall rate of return you can earn on your investments. After all, if a company you own goes belly up, that can be devastating to you if it’s the only stock you own, or it could be no big deal if it’s just a small position within a well-diversified portfolio.
To diversify appropriately, consider owning around 20 stocks or more in roughly equal proportions. Make sure the companies belong to different industries across the economy so that the collapse of an entire industry doesn’t wipe out your net worth. If you want to protect your overall return potential, it’s also important that each investment in your portfolio is one you’re willing to own on its own, not just because it adds diversification to your holdings.
As you get closer to retirement and include more conservative tools like a bond ladder as part of your overall financial plan, you should extend the concept of diversification to those investments as well. After all, while bonds are lower risk than stocks due to their higher priority on a company’s capital structure, they are not risk-free investments.
No. 9: Stocks play an important role, even for retirees
While stocks tend to be volatile investments that offer no guarantee of returns, the overall stock market has delivered average annualized returns around 9.5% over the long haul. That solid potential return rate means stocks can play an important role for the long-term part of your portfolio, even once you have retired. The thing to remember, however, is that because stocks are volatile, you can’t rely on them performing the way you need them to perform when you need immediate spending cash.
Instead, in retirement, you should start viewing your stocks as a way to replenish your bonds or other shorter-term, higher-certainty investments as you spend down those higher-certainty assets. When the stock market is performing exceptionally well, you can shift more money out of stocks, thus boosting your buffer. When the market is performing poorly, you can shift less -- living off your buffer of higher-certainty assets while waiting for the stock market to turn back in your favor.
No. 10: Plan for your healthcare costs to rise in retirement
Hopefully you will have a long, happy, and healthy retirement. Odds are, however, that as you age, your healthcare needs will increase. Health spending tends to increase as people age and need more services, and healthcare inflation has typically outpaced overall inflation, forcing seniors to face a double-whammy as they age.
While Medicare helps with many of the healthcare costs seniors face in retirement, the program does not cover all expenses, nor does it cover 100% of the bill. Indeed, the average senior citizen spends around $4,300 a year on healthcare costs. As a result, your retirement budget should include money to help keep you well as long as you can stay that way -- and then money to help cover the costs of your care as you age.
You should also consider a Medicare Supplement or Medicare Advantage plan to help cover the costs that standard Medicare parts A and B do not. Those plans can help, but they generally come with premiums attached. As a result, know that you’ll be trading more out of pocket today for the potential of paying less over time, assuming you need covered services.
No. 11: You need a plan for your time as well as a plan for your money
Once you retire, you will still have 24 hours in each day, and seven days in each week. Without a good plan for how to fill all that time, many retirees wind up bored and depressed in what should be their golden years. As well as a paycheck, work provides social interaction, problem solving opportunities, and structure to most people’s days. These can be incredibly valuable things for retirees to have, and they don’t have to stop just because the nine-to-five workday does.
Many successful retirees find that they’re most satisfied when they are working a "retirement job" -- whether paid or not -- that gives them the structure and interactions they missed from work. It could be volunteering with a charity, taking up lower-paid, lower-stress work, or helping out with the grandkids and others in the neighborhood.
However you choose to fill your days in retirement, do what you can to assure you fill them with people and purpose meaningful for you. With a strong plan for your time complemented by a strong plan for your money, you can maximize the benefits you get from the retirement stage of your life.
No. 12: Realize that all retirements someday end
Unfortunately, we humans have not yet mastered the secrets of immortality and eternal health. As a result, everyone’s retirement does some day come to an end. Planning for that eventuality will go a long way towards easing that burden for the loved ones you leave behind, even if they don’t stand to inherit anything more than memories.
Everyone needs an estate plan. That plan will likely include some combination of a will, a trust, advance directives for end of life care, and a power of attorney to make decisions on your behalf if you become incapacitated before you pass. These things are clearly important because they help make sure your assets go where you want them to when you’re gone. They also serve another important role of easing the burden on your loved ones who will have to dispose of your estate while they’re grieving your loss.
With a solid plan, you improve your chances of enjoying your retirement
With well thought out plans for your money, your health, your time, and your final wishes, you can spend more of your time, energy, and finances on the things that matter to you most in retirement. That will go a long way towards helping you make the most of your golden years and assuring your family has the smoothest transition it can have once you’re no longer with us. That is a legacy worth living for, no matter what financial situation you may leave behind.
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