Dreaming of retirement? Focus on these 5 key factors.Submitted by Korhorn Financial Group, Inc. on July 24th, 2018
By Matt Hoke, CFP®, ChFC
Retirement. It seems to be every working person’s dream. But retirement dreams can also cause a lot of anxiety, especially the closer those “golden years” become. With 10,000 Baby Boomers turning 65 every day, the question I hear over and over again is, “Can I retire?” and “If so, when?” The answer isn’t always so easy.
In last month’s blog post, Amy Masters talked about the importance of finding your ‘why’ in retirement—the first step toward understanding how much money you’ll really need to make your retirement vision a reality. In Amy’s words, “Once we know your ‘why’, we can figure out how much money you need to make your retirement dreams come true.” The next step requires a deep dive into 5 key factors that reveal how much time you have to plan, how much money you have to work with, and how to create a portfolio that allows your money to outlast your retirement—and not the other way around!
- When do you want to retire?
They say age is just a number. When it comes to planning your retirement, that couldn’t be more true. The age at which you want to retire is a huge factor in planning for your retirement, as is the age when you start planning and saving. If you start planning and saving when you’re young, time is on your side. The longer your money is working for you, the more you are able to take advantage of the magic of compounding to help generate greater wealth over time. The older you are when you start, and the earlier you want to retire, the fewer years you have to save and invest—and the less time you have to readjust your plan if it’s not on track to fulfill your retirement goals.
- How much will you need to spend?
If your retirement vision is realistic based on your current financial picture, what you spend today offers the clues you need to estimate your spending in retirement. Start by looking closely at your current cash flow. Next, identify which expenses are likely to decline in retirement (such as mortgage and education costs), which are likely to increase (such as healthcare, travel, and entertainment), and which are likely to remain relatively constant (such as food and utilities). Calculate a ballpark retirement budget and give it a trial run by living on that dollar amount for a few months. Does it seem realistic? If it doesn’t, now is the time to rethink your expectations.
- How much do you save?
This number includes both how much you’ve saved for retirement to date, and how much you’re adding to that savings every month. The earlier you start saving, the less you will have to cut into your income each month moving forward. If you’re closer to retirement and falling short, you may have to make some sacrifices to allow you to increase your rate of savings to meet your retirement goals.
- What sources of income will you have?
Most retirees have multiple sources of income. You can count on a Social Security check (two if you’re married), which may be a significant portion of your income. If you’re one of the lucky ones with a pension, that’s even better. But if you’re like most people today, your retirement savings will be the largest source of your income. Also consider whether you plan to work at all in retirement. Many retirees find that part-time work does much more than just supplement their income; it also keeps them active, opens up new social networks, and offers a new sense of purpose. Whether you choose to work a few hours a week at Home Depot to put your handyman knowledge to work or to continue your career by building up a consulting practice, working in retirement may help enhance your dreams in more ways than you ever expected.
- What is the size and structure of your portfolio?
Looking at the first four factors outlined above—when you want to retire, how much you spend, how much you save, and your sources of income in retirement—you now have the information you need to see just how long your portfolio should last. But portfolio size is still just a number. The structure of your portfolio, including how your assets are allocated and how much risk you take, will determine your potential rate of return, and ultimately how much income you can take from your portfolio each year. Remember that retirement is not an event; it is a process and a new stage of planning. If you’re lucky enough to live a long, healthy life, this new stage of planning could be a long one. Your portfolio should be structured to achieve growth that outpaces inflation, and to provide income that can support your lifestyle for the rest of your life—which could be 30 years or more.
Using these 5 factors, a Certified Financial Planner (CFP) can help take the mystery out of retirement planning and provide clarity and confidence. Based on your ‘why,’ your advisor can pinpoint where you are today and help you gain clarity on the path forward. If your plan is not on track, your advisor can provide creative solutions that balance the tradeoffs between saving, spending, and working longer. If your plan is on track—or even ahead of pace—you can move forward with less stress and a new level of confidence in your financial future.
Either way, knowing the facts and understanding what you need to do to reach your goals will provide greater clarity and confidence about retirement moving forward. Now is the time to take that deep dive into your own 5 factors and, with the help of a Certified Financial Planner (CFP), build your plan. Then sit back, relax, and get back to dreaming!