One of the main concerns for most adults, at least those in their 40s or older, is that of having enough money to not only last through their retirement years but to support themselves in a lifestyle that is similar to what they have now. When you combine this concern with the fact that people are living longer lives it becomes apparent that planning for retirement is vital, especially with the real risk of running out of funds before you run out of days. With that rather bleak and frank assessment clearly in our minds we put together a blog with some frank (but not so bleak) advice for retirement planning. Enjoy.
They 4% rule.
One of the biggest challenges when planning for retirement is determining how much money is going to be enough to last and support you at a lifestyle that doesn’t require you to eat canned tuna fish every day. One of the main goals for retirement is to be able to live at one’s current lifestyle, no matter what that lifestyle may be. One of the best ways to calculate the amount of money you’re going to need is a rule known as the ‘4% rule’ which states that a person between the ages of 60 and 65 should be able to safely withdraw 4% a year from their portfolio and not risk running out of money for at least 30 years.
If you use this rule you would need to accumulate approximately $1.5 million by the time you reach retirement in order to be able to withdraw approximately $60,000 per year for the required 30 years, no insignificant sum by any means. If you want to support yourself with $100,000 per year you would need to accumulate approximately $1 million more or $2.5 million. Clearly, Social Security isn’t going to be ableto cover this completely by any stretch of the imagination and so taking advantage of every savings plan possible, including 401(k)s, IRAs and so forth is going to be necessary so that you can use the power of compound interest to reach these relatively high nest egg numbers.
Don’t forget about taxes.
One thing that many investors either overlook or forget is that taxes are going to cost them and affect their retirement income and cash flow. That being said, tax planning should be as well thought out and thorough as possible. Diversifying your pre-retirement savings with taxable, tax-free and tax-deferred accounts is one of the best ways to offset this cost and will allow the intelligent retirement planner to fine-tune their portfolio and better choose which of their accounts to tap into and when during retirement.
Tax experts agree that using taxable accounts first is a good strategy that allows the retiree’s savings to grow in their tax-deferred IRA and Roth accounts because they will pay less income and capital gains taxes.
Take advantage of social security, with caution.
If we’re being completely honest we have to say that the future of Social Security is a murky one and counting on it to fund your retirement may not be in your best interest. Current projections show that, by 2016, payouts are going to exceed revenues in this federal program if no reforms are put into place. That being said, it is believed that payouts will continue to be 100% until 2033. Frankly, while we certainly wouldn’t bank on Social Security, the extra benefit that it provides is certainly something that should be included into any smart retirement plan. (With caution, of course.)
This is one of the toughest parts for most people planning their retirement, especially those who are within 5 to 15 years of their intended retirement date. In many cases, once a person or couple reaches retirement age they find that their current lifestyle is unsupportable and that they need to restructure and rethink their options. In short, they need to either work longer or sufficiently reduce their lifestyle needs down to where their retirement funds can support them.
Foreign exchange traded is often written off easily due to the perceived risk in the investment, but on the contrary it can actually be quite a good financial instrument for hedging foreign investments. The U.S. Dollar and other currencies are constantly going up and down, it would be nice to hold a basket of currencies to weather those fluctuations. Online brokerage accounts tend to offer the lowest fee transactions. If you are still daunted by the thought of forex investment online, there are sites that offer a forex practice account for those that are eager to learn more about it.
We realize that retirement planning is complex and that there are certainly no guarantees. Our blog today doesn’t even go into Medicare’s murky future and the ever increasing and ridiculous (as well as scary) cost of healthcare. Working with a financial advisor that is fee-only is a smart idea and will greatly increase the chances that, by retirement, your savings and investing goals will have been met. We hope this blog has been of some use and value and we invite you to come back often for more advice and tips on all things financial. See you then.