A successful retirement doesn’t happen overnight; it’s part of a long process that starts many years before you draw your final paycheck.
If you have the wisdom, discipline and foresight, retirement planning should start the day you enter the workforce. Admittedly, few people take this path. But if you get in the habit of making good choices regarding retirement early in your career, your golden years can be exceptionally golden.
Your income and career will enjoy peaks and valleys, setbacks and promotions. But your path to retirement can be delineated into three stages. Engaging in specific strategies in the first two stages is the best way to chart a course for a stable, secure and enjoyable retirement.
The Accumulation Stage
This is a very important time in your retirement planning. It starts the day you enter the workforce and typically runs until you’re about 55. That age may fluctuate depending on how successful you are and what plans you put into place.
For the purposes of this article, let’s assume most people actively plan for their retirement to start when they turn 65. That’s when Medicare kicks in, the home might be paid off and one’s children are likely done with college and have moved out. People are also generally still young enough to look forward to many years of relaxation and relatively good health.
According to a 2015 study by the Transamerica Center for Retirement Studies, 67% of wage earners have already started saving by age 22. However, growing a nest egg does not usually kick into higher gear until workers enter their 30s. At that point, three out of four are saving for retirement, and 87% prefer to make their own decisions about retirement investments. This happens even though two-thirds admit they don’t know as much as they should about investing, the study found.
As people progress through this stage, they often face significant financial challenges. These can include buying a home, starting a family, job changes and health issues.
In my experience, reality sets in at about age 45, and people become a lot more diligent about saving for retirement. The key is to get into good habits and develop a plan that will pay handsome dividends later in life. You need to ask yourself some serious questions before you can put together a focused and realistic plan:
- How much money will I need for a comfortable retirement?
- Where do I want to live, and what kind of budget will that require in retirement?
- Based on my career path and income, what additional steps will I need to take to achieve my monetary and lifestyle goals?
- What contingencies and protections do I need to build into my long-term retirement goals?
- What is my level of risk when it comes to making investments?
- Should I pay off my mortgage before I retire?
- What is my plan for medical expenses in retirement?
In addition to long-term goals, there are things you can start doing at any age during the Accumulation stage:
Create a budget
Track your fixed and discretionary expenses. Include a separate amount for savings. Adjust as you go, but remain disciplined.
Don’t buy a bigger house or fancier car than you can afford. Stop comparing yourself to others. Be frugal, and avoid temptations that will undermine your efforts.
Understand the impacts of time and compounding
The earlier you start, the less you’ll have to save each month to meet a retirement goal. If you’re 25 and want to save $1 million by age 65, assuming an average 6% rate of return monthly, you’ll need to save $502 per month. If you wait until 45, the amount you must save jumps to $2,164.
Choose the right mix of investments
Become financially literate, either on your own or with the help of a financial advisor. Understand the pros and cons of certificates of deposit, stocks and bonds, traditional individual retirement accounts, Roth IRAs, company 401(k) plans, pension accounts, Social Security, Medicare, life insurance, annuities, real estate and other vehicles to protect and grow your retirement funds.
Add layers of protection
Consider long-term disability insurance, life insurance and other types of protection in case you or a family member becomes permanently disabled or passes away.
The Pre-Retirement Stage
In my experience, most people get more focused at 55, about 10 to 12 years from retirement. Savings rates go up. Debt goes down. There are a lot of life transitions, many that allow you to shift your financial goals to actively thinking about retirement.
At this stage, people are often creating some known outcomes and expectations that can bring realistic scenarios into focus. They become more realistic about retirement income and have the opportunity to adjust and play catch-up if they find themselves falling short.
This is a time to increase 401(k) contributions, pay off your home and shift to more conservative investments. You should also be thinking about any tax implications that might impact your retirement income when you take drawdowns from your accounts.
The Retirement Stage
The final stage starts the day you retire and start drawing retirement income. You made it! The age people retire varies, but many people target when they decide to start drawing Social Security as their benchmark.
If you’ve been diligent and disciplined and have made good choices, you can thoroughly enjoy this season of life. In fact, my experience in personal practice and later working with hundreds of financial advisors has shown me how many people who did a good job planning spend more money in their first five years of retirement than they did in the five years immediately before retirement. Now is the time to reward yourself, buying the toys you’ve always wanted, taking trips, visiting friends and going through your bucket list.
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