Maybe you don’t care about being
rich. But it takes money—lots of it—to retire. Will you have enough?
Whatever your vision of retirement is—be it crisscrossing the country in a plush RV, building your dream home by the lake or hitting the links at the world’s elite golf resorts—you’ll need a sizable nest egg to make it happen.
Your plans aren’t so grandiose, you say? Well, even if your ambition is to putter around in the garden and spend quality time with the grandkids, it may take more money than you think.
That’s because Americans are living longer, healthier lives than ever, a shift that is dramatically changing how we experience retirement. Rather than scaling back for a life of simple leisure, many retirees embark on a bold—and often costly—new stage in life. At the same time, Americans’ personal-savings rate is the lowest it’s been since the Depression, a sign that we’re not saving nearly enough for the future.
“I think in the next 10 years we’re going to see a radical reinvention of retirement as the baby boomers hit retirement age,” says Christine Larson, a Sacramento-based writer and co-author of The Family CFO: The Couple’s Business Plan for Love and Money (Rodale Press, 2004). “The positive side of that is that people will be working longer, staying engaged, maybe even starting new careers and new businesses, they’ll be more active, and certainly they’ll be healthier than ever before. But the downside is that some people are certainly not going to have as much money as they expected in retirement.”
Most people assume that their cost of living will diminish after they leave the workplace, but this isn’t necessarily the case. Being active, after all, costs money.
“I think it’s a fallacy to think that your needs are going to go down very much in terms of income,” says Larson. “Yes, you may not be commuting to work, maybe you’ve paid off your house, but other costs will continue to increase. And are you just going to sit around in your house all day? Of course not. You go out, and every time we go out, we spend money.”
Another mistake people make is assuming that their pension alone will cover their financial needs later in life. “That’s a very dangerous, complacent view,” according to certified financial planner Cynthia Meyers. “The pension is a good foundation, but it’s not enough. You need outside investments to complement that pension.”
Unsurprisingly, those who start saving early are in the best position to retire with a considerable sum in their coffers. Meyers, an independent financial planner, recommends saving for retirement “as early as possible” in order to benefit from compounding interest. “Because of the miracle of compounding, your money grows with you not having to work for it,” she says.
Unfortunately, there is no set figure on how much you should be socking away. “I often hear the question ‘How much should we be saving for retirement?’ and everyone wants a really comforting answer, like 10 percent of your income,” says Larson. “But the real unsettling fact is that no one really knows how much is going to be enough.”
Larson contends that the real question is not how much should you save but how much can you save. “And unfortunately, the answer to that is that you should save absolutely whatever you can for retirement.”
That may be gloomy news for some, but don’t despair. Regardless of where you are in your retirement planning—or if you haven’t begun planning at all—there are concrete steps you can take to put yourself on a path to a carefree retirement.
Start with your values. Evaluate what is important to you and why. “At the heart of all financial planning is the person,” says Meyers. Your money “has got to be put to use for a purpose that is important for you.”
Larson says talking about values is especially important for couples. “You and your partner need to sit down and talk about priorities before you start talking about money,” she says. “If you take the time to answer some of those really difficult questions, you’ll fight less about money.”
Establish good habits now. “I think having a good retirement life is about having good practices,” says Meyers, such as saving for both short- and long-term goals and being comfortable living below your means—a tough challenge in a consumer-driven culture.
Good habits might also involve simplifying your finances. “Many people believe that good financial hygiene means that things have to be very complicated,” says Larson. “Actually, you’ll drive yourself crazy if your finances are too complicated.” So don’t be afraid to keep things simple.
Sign up for automatic payments. Both Meyers and Larson underscore the importance of setting up automatic transfers into your savings and investment accounts. “If your money is going automatically toward your priorities,” says Larson, “then you’ll never feel it.” Meyers recommends establishing two plans: one that moves funds into a savings account to be used for emergencies or short-term expenditures, and another into a long-term retirement vehicle like a 401(k) or IRA.
Invest wisely. Once you’ve committed to an automatic savings system, be sure your money is in the right place. Investing wisely, says Meyers, simply means being diversified in a variety of investments. If one goes south, you’ve got some built-in protection.
And as Larson points out, investing wisely doesn’t mean avoiding risk altogether, like putting all your money into a fixed asset such as a money market account. “It sounds counterintuitive, but it can actually be a risk not to take a risk,” she says.
Meyers concurs, adding that age is only one factor to consider when evaluating risk. The bigger issue is your comfort level. “A lot of it is personal,” says Meyers. “The question is, can you sleep at night with the portfolio you have? That is paramount.”
Adjust as you go. Preparing for retirement isn’t a one-time activity. Your portfolio will need occasional fine-tuning as the financial markets shift and your life situation changes, whether due to marriage, children or a new job. It’s wise to revisit your investment plan at least annually. “Financial planning is an ongoing and constant process,” explains Meyers.
Expect the unexpected. Too often, retirement plans focus solely on savings and investments, but they’re only part of the equation. Just as important is protecting yourself against costly surprises by obtaining adequate life and homeowners insurance policies tailored to your particular situation. Flood and disability policies also may be wise choices for some. A qualified financial planner can help you determine how to best protect your assets and avoid financial disaster.
Prepare emotionally, too. Sound financial planning is important for a comfortable retirement, but don’t ignore the emotional component of this major life event. “Retirement is one of the biggest moments in your life,” says Meyers, who gets her clients thinking about their new life five years before their retirement date.
“Many people who retire early end up going back to work, and that hints at the emotional needs of retirees,” Larson points out. “It’s often not just economics; it’s that people can feel really disconnected and they don’t know what to do with themselves.”
Inflation: Can You Keep Up?
Remember your parents’ nostalgic stories about paying a nickel for a cup of coffee? Thanks to inflation, you, too, may someday long for the good old days when a trip to Starbucks set you back a mere $3.50—especially if you retire on a fixed income. Here’s a glance at the future cost of an active retirement, assuming a 3 percent annual rate of inflation.
Today In 10 years In 25 years
Round of golf at a public course $30 $40 $63
Dinner for two at a nice restaurant $150 $202 $314
Annual athletic club membership $960 $1,290 $2,010
Weeklong vacation for two to Paris $6,200 $8,332 $12,981
Finding a Financial Planner
Can you tell a 529 account from a Coverdell? Do you know the maximum you can contribute to a Roth IRA in 2007? Are you confident your portfolio is sufficiently diversified?
If you answered no to any of those questions, don’t feel bad. Saving for retirement is a lot more complicated today than stashing away a wad of cash in a shoebox. It takes considerable time and effort, thanks to factors like expanding investment options and annual changes in tax law.
While some people take pleasure in managing their finances, even making a hobby of it, others loathe money matters so much that the mere sight of a bank statement propels them into panic. Whatever your situation, most people can profit from some occasional professional advice, according to finance writer Larson.
“I think that most people would benefit from at least a once-in-a-while check-in with a financial planner,” says Larson, adding that a trained financial adviser can spot problems “really easily and can prevent some pretty serious mistakes.”
Veteran financial planner Meyers agrees, explaining that it’s easy to be stymied by the details of retirement planning. “In this day and age, everything is so complex that we can’t learn it ourselves. So we have to rely on other people to help us, and I think that’s the role of a good financial planner.”
But how do you find a capable adviser you can trust? For starters, look for someone who is credentialed as a certified financial planner, says Larson. “There are over 60 designations for financial planners,” she says, but certified financial planners have specialized training and are subject to a complaint process and disciplinary action should a problem arise. Before hiring someone, check his or her standing on the Certified Financial Planner Board of Standards website, cfp.net.
Second, the best advisers are trained to evaluate your situation holistically. In other words, they can offer sound advice not only about investing—which is but one part of financial planning—but also strategies for saving on taxes, paying off debt and securing adequate insurance coverage.
Third, when shopping around, get a clear understanding of how the planner will be paid. “I’m a big believer in fee-only planners,” says Larson. “Fee-only planners either charge an hourly fee or a percentage of the assets that they manage for you. What’s most important is that fee-only planners do not receive a commission from selling you investments.” That way, they are free to recommend products and services that are best for your circumstances, not just their bottom line.
Beware of any adviser who skirts around the payment issue. “You should be able to ask them how they’re paid and get an honest answer without dancing around the question,” says Larson.
Finally, once you’ve identified a credentialed planner, make sure your personalities are compatible. “Trust your gut,” advises Meyers. “You want an adviser that you feel comfortable with.” Do you respect his or her philosophy about money? Can you ask questions without feeling dumb? If not, keep shopping until you find a suitable match.
Choices: Which One’s Right for You?
If you’re reading this article while sipping Cristal aboard your private jet, you’re probably one of the lucky few who are not sweating retirement planning. For the rest of us, however, enjoying a financially comfortable retirement means setting priorities in order to maximize our limited dollars—a process that can involve some tough decision making. We examine three common financial dilemmas and explore how smart choices today can result in a rewarding retirement later.
1. Save for retirement . . . or pay down debt?
If you are drowning in credit card bills like millions of other Americans, is it feasible or even advantageous to try to save for retirement? Most experts say yes, you should pay down debt while also building a nest egg, however modest it may be. The ratio in which you do so, however, depends in part on how much you owe and at what interest rate. Meyers advises paying down the debt with the highest rate first, consolidating it on a fixed-term zero-interest credit card if necessary—but only if you’re disciplined. “I still would be an advocate of putting a small amount into a 401(k),” says Meyers, adding that it’s also vital to replenish your savings in order to avoid the credit card trap in the future.
2. Fund your retirement . . . or your child’s education?
Like other well-meaning parents, you probably want to pay for at least some of your children’s college education so that they’re not saddled with mountains of debt after graduation. But does that mean you should forgo saving for your retirement? Absolutely not, say the experts. “You can borrow for college, but who’s going to take care of you in retirement?” asks Meyers. That doesn’t mean your kids have to fend for themselves. Just make sure to contribute to your retirement first. After all, if you can retire comfortably, you can always help them pay off their student loans later.
3. Stay home to raise children . . . or keep your paying job?
Decisions about what arrangement works best for your family are, of course, intimately tied to your personal values and preferences. But from a strictly financial standpoint, if you leave a well-paying job to stay home full time with your children, “you’re taking a big risk financially,” according to Meyers. She says it’s more than the lost income that’s at stake—you also miss out on promotions, skill building and opportunities to amass financial assets that could benefit your children in the future. If having one parent stay home is best for your family, practice living off of one income first to see if it’s financially feasible. And as you trim your spending, don’t neglect saving for retirement—even if it’s just a small amount.
The 411 on 401(k)s
Allocating your retirement investments is one of the most important financial decisions you’ll make (after settling on just how much to sock away). Yet most people are woefully unprepared for the task, according to Lon Burford, principal for retirement plan asset management at the Sacramento-based financial advisory firm Genovese, Forman & Burford.
“An awful lot of people are uncomfortable making their 401(k) selection,” says Burford. “There is very conclusive evidence in studies that, on balance, most employees don’t make very good decisions with their retirement plans.”
Anyone who’s had the displeasure of thumbing through a fund prospectus while enrolling in an employer-sponsored retirement plan such as a 401(k), 403(b) or 457 knows what Burford means. Sure, the descriptions are written in English, but whether they make sense to the average investor is another matter.
A new type of fund offering—so-called “target retirement” funds—aims at simplifying the process. Instead of the employee choosing which funds to invest in, fund managers control the allocations based on either the individual’s target retirement date or his or her tolerance for risk. The managers rebalance the portfolio regularly throughout the life of the investment.
Target retirement funds are increasing in popularity, but are they right for you? Burford says that depends. They may be a wise choice for investors who are unsure of how to create a diversified portfolio or are disinclined to fine-tune the account every six to 12 months.
But there are drawbacks. “Whenever you do something that is cookie-cutter, you give up customization,” explains Burford. The allocations won’t necessarily complement other investments you may have outside the 401(k), for example. And the quality of the funds currently available runs the gamut—some are winners, others big losers.
Whatever route you choose, the key is to choose a fund family with a solid track record. And watch for hidden fees that can cut into your earnings.
You may be squirreling away a healthy sum for retirement, but are there still weak spots in your financial plan? Certified financial planner Scott Hanson, founding principal of the Sacramento-based financial advisory firm Hanson McClain and co-host of the call-in radio show “Money Matters,” offers his take on three financial scenarios—and shows that even savvy savers have room for improvement.
Bill and Brandy Boyd
Bill, 38, project manager
Brandy, 36, part-time freelance writer
Two children, ages 5 and 2
Financial snapshot: Bill and Brandy own their home and have made significant progress toward paying down their low-rate, 30-year mortgage. Aside from a car loan, they are debt-free. Bill currently contributes 13 percent of his paycheck to a 401(k) plan, and the couple already has amassed a healthy retirement savings. His employer also offers a generous pension plan.
What the expert says: According to Hanson, Bill and Brandy are in stellar financial shape thanks to sound savings habits. If they continue to live below their means, they can look forward to a comfortable retirement. However, although they have the requisite emergency savings on hand in case of an unexpected setback, they have not planned adequately for the possibility of one of them dying, an event that Hanson says would be “financially devastating.”
Hanson recommends two protective steps. First, the couple should set up a simple will to designate a legal guardian for their children. Second, Bill should purchase a fixed-premium term life insurance policy with benefits equaling seven to 10 times his annual income. Because Brandy’s income is currently much lower than Bill’s, it’s not vital that she purchase life insurance at this time.
Janet, 57, editor
Two grown children
Financial snapshot: Janet bought her home in 2003 and has watched its value rise steadily in her up-and-coming neighborhood. She diligently contributes about 14 percent of her paycheck to a 401(k) plan while stashing away a little cash in a savings account each month. Janet has a modest monthly car payment and no credit card debt. As she looks toward retirement—she hopes in the coming decade—Janet is concerned she’ll be unable to live on the fixed income from her retirement investments and Social Security.
What the expert says: One of the biggest benefits of homeownership in retirement is having fixed housings costs, says Hanson. However, because Janet’s mortgage is an interest-only loan fixed at 6 percent for just the first five years, her monthly payments could balloon when that low rate expires.
For Janet to retire in 10 years, Hanson strongly recommends securing a mortgage with a fixed rate for the life of the loan. Although the monthly payments may be higher than what she pays currently, Janet gains peace of mind knowing they won’t soar when the introductory rate expires. Hanson applauds Janet for being a disciplined saver but recommends she consider contributing a little less to her 401(k) plan in order to pay for the increased mortgage payment. She may also be a good candidate for a reverse mortgage when she retires, a move that would eliminate her monthly mortgage payments altogether.
Jake and Tracy Chatters
Jake, 31, research and evaluation manager
Tracy, 31, part-time substitute teacher
One child, age 3
Financial snapshot: Jake and Tracy describe their money management style as “old-fashioned”: They loathe debt, preferring to pay cash whenever possible. However, they fear they are playing it too safe with their investments given their young age. The couple has a low fixed rate on their home mortgage and no consumer debt. Jake currently contributes about 2 percent of his earnings to his employer’s retirement fund. They are invested in mutual funds, bonds and CDs, in addition to education savings accounts for their son.
What the expert says: Hanson applauds Jake and Tracy’s financial discipline, saying they will enjoy a fruitful retirement if they continue their good habits. However, because the bulk of their investments are not in retirement vehicles, they are missing out on the considerable tax savings that such investments offer.
Hanson recommends two steps—shifting their investments into an IRA and contributing the maximum allowed to Jake’s retirement plan—in order to reap substantial tax benefits. As for their desire to take greater risks, Hanson says the key at any age is a well-rounded portfolio. “You can get full diversification with six to eight funds,” says Hanson.