It isn't how much you make
. . .It's how much you keep!
Archive for financial planning – Page 4
To enjoy your retirement without financial worries, make sure you have enough money saved when you retire. This calculation can be a daunting task, since a variety of factors affect your required amount and inaccurate estimates for any factor can leave you with way too little in savings. Some of the more significant factors
include:
What percentage of your preretirement
income will you need?
You can find various rules of thumb indicating you need anywhere from 70% to over 100% of your preretirement income. On the surface, it seems like you should need less than 100% of your income. After all, you won’t have any work-related
expenses, such as clothing, lunch, or commuting costs. But look carefully at your current expenses and how you plan to spend your retirement before deciding how much you’ll need. If you pay off your mortgage, stay in good health, live in a city with a low cost of living, and engage in inexpensive
hobbies, then you might need less than 100% of your income. However, if you travel extensively, pay for
pay for health insurance, and maintain significant debt levels, even 100% of your income may not be enough. You need to take a close look at your expenses and planned retirement activities to come up with a reasonable estimate.
When will you retire?
Your retirement date determines how long you have to save and how long investment returns can compound. You want to make sure your retirement savings and other income sources, such as Social Security and pension benefits, will support you for what could be a very lengthy retirement. Even extending your retirement age by a couple of years can significantly affect the ultimate amount you need.
How long will you live?
Today, the average life expectancy of a 65-year-old man is 81 and of a 65-year-old woman is 84 (Source: Social Security Administration). Most people use average life expectancies to estimate this, but average life expectancy means you have a 50% chance of living beyond that age and a 50% chance of dying before that age. Since you can’t be sure which will apply to you, it’s typically better to assume you’ll live at least a few years past that age. When deciding how many years to add, consider your health as well as how long other family members have lived.
What long-term rate of return do you expect to earn on investments?
A few years ago, many retirement plans were calculated using fairly high rates of return. Those high returns don’t look so assured now. At a
minimum, make sure your expectations are based on average returns over a very long period. You might even want to be more conservative, assuming a rate of return lower than long-term averages suggest. Even a small difference in your estimated and actual rate of return can make a big difference in your ultimate savings.
Have you considered inflation?
Even modest levels of inflation can significantly impact the purchasing power of your money over long time periods. For instance, after 30 years of just 2% inflation, your portfolio’s purchasing power will decline by 45%. When estimating an inflation figure, don’t just look at the historically low inflation rates of the recent past. Also consider long- term inflation rates, since your retirement could last for decades.
What tax rate do you expect to pay during retirement?
Especially if you save significant amounts in
tax-deferred investments that will be taxable when withdrawn, your tax rate can significantly affect the amount you’ll have available for spending. You may find your tax rate is the same or higher fter retirement.
Once you’ve estimated these factors, you can calculate how much you’ll need for retirement.
Please call if you’d like help with this calculation.
Retirement planning is a life-long process. Below are some of the key retirement-planning actions you need to be taking from your 20s through your 60s.
Your 20s
Start saving. The sooner you can start saving for retirement, the less you’ll have to save overall. If you start saving $5,000 per year at age 25, you’ll have just under $775,000 by age 65, assuming annual returns of 6%. Wait until age 35 to start saving and you’ll have about $395,000 — more than $300,000 less. Also, since you’re still decades away from your retirement date, don’t be afraid to take some risk with your investments. You’ll have to stomach some ups and downs, but earning higher returns from equity (or stock) in-vestments now means more money (and less to save) as you get older. Other steps to take when you’re young: start budgeting, avoid debt, and save for other goals, like buying a house. Even if you’re not earning a lot right now, adopting healthy money habits today will pay big dividends later in life.
Your 30s
As you enter your 30s, your in-come is probably heading upward and your life is beginning to stabilize. You may find that you can contribute more to your retirement savings accounts than you could in your 20s. As your income increases, consider increasing your retirement contributions by the amount of your annual raise so you don’t fall behind on saving. Reassess your savings rate and consider meeting with a financial advisor to make sure you’re saving as much as you can — and investing it well.
Your 40s
You’re at the halfway point to retirement. If you’ve been saving for the past 10 or 20 years, you should have a nice nest egg by now. If you
haven’t gotten serious about saving, now is the time to do so. You’ll have to be fairly aggressive, but you still have some time to build a respectable financial cushion. Whether you’re an accomplished saver or just getting started, you may also want to consider meeting with a financial advisor to help you make sure you’re saving enough to meet your goals and investing in the best way possible.
A special note: people in their late 40s and early 50s are often looking at steep college tuition bills for their children. Don’t make the mistake of sacrificing your retirement goals to pay for your children’s college educations. Stay focused and on track so your children don’t have to jeopardize their financial future to support you as you get older.
Your 50s
Once you turn 50, you have the option to make catch-up contributions to retirement savings accounts like 401(k)s and IRAs. You can save an additional $6,500 a year in your 401(k) plan and $1,000 a year in your IRA in 2021. That’s great news if you’re already maxing out your savings in those accounts. Your fifth decade is also the time to start thinking seriously about what’s going to happen when you retire — when exactly you’re going to stop working, where you want to
live, whether you plan to work in retirement, and other lifestyle is-sues. It’s also the time to take stock of your overall financial situation. You’ll still want to keep saving as much as you can, but you may also want to make an extra effort to be debt-free at retirement by paying special attention to paying off your mortgage, car loans, credit card debt, and any remaining student loans.
Your 60s
Retirement is just a few years away. If you haven’t already, you’ll want to dial down the risk in your portfolio so you don’t take a large loss on the eve of your retirement. You’ll also want to start thinking about a firm retirement date and estimating your expected expenses and income in retirement. If your calculations show that you’re falling short, it’s better to know before you stop working. You can make up a shortfall in a number of ways — reducing living expenses, working a bit longer, and even delaying Social Security payments so you get a larger check. Whatever your age, the key to retirement is having a plan and consistently executing that plan. Not sure how to get started? Please call so we can discuss this in more detail.
Your asset allocation strategy represents your personal decisions about how much of your portfolio to allocate to various investment categories, such as stocks, bonds, cash, and others. Some of the advantages of an asset allocation strategy include:
Providing a disciplined approach to diversification. An asset allocation strategy is another name for diversification, an important strategy for reducing portfolio risk. Since different investments are affected differently by economic events and market factors, owning various types of investments helps reduce the chance that your portfolio will be adversely affected by a particular risk type.
Encouraging long-term investing. An asset allocation strategy is designed to control your portfolio’s long-term makeup.
Eliminating the need to time investment decisions. Not only do investment professionals have a difficult time accurately predicting the market’s movements, but waiting for the perfect time to invest keeps many investors on the sidelines. With an asset allocation strategy, you don’t have to worry about timing the market.
Reducing the risk in your portfolio. Investments with higher returns typically have high-er risk and more volatility in year-to-year returns. Asset allocation combines more aggressive investments with less aggressive ones. This combination can help reduce your portfolio’s overall risk.
Adjusting your portfolio’s risk over time. Your portfolio’s risk can be adjusted by changing allocations for the different investments you hold. By anticipating changes in your personal situation, you can make those changes gradually.
Focusing on the big picture.Staying focused on your asset allocation strategy will help prevent you from investing in assets that won’t help accomplish your goals.
Your asset allocation strategy will depend on a variety of factors unique to your situation, including your risk tolerance, return expectations, investment period, and investment preferences. Please call if you’d like to discuss asset allocation in more detail.
Are you making progress toward your financial goals? Are your finances in order? Are you prepared for a financial emergency? If you’re not sure, take time to thoroughly assess your finances so you have a road map for your financial life:
Assess your financial situation.
Evaluating where you currently stand financially will help you determine how much progress you are making toward your financial goals. There are several items to consider:
Your net worth — Prepare a net worth statement, which lists your assets and liabilities with the difference representing your net worth. Prepared at least annually, it can help you assess how much financial progress you are making. Ideally, your net worth should be growing by several percentage points over inflation.
Your spending — Next, prepare a cash-flow statement, detailing your income and expenditures for the past year. Are you happy with the way you spent your income? You may be surprised by the amount spent on non-essential items like dining out, entertainment, clothing, and vacations. This awareness may be enough to change your spending patterns. But more likely, you will need to prepare a budget to help guide your future spending.
Your debt — Debt can be a serious impediment to achieving your financial goals. To assess how burdensome your debt is, divide your monthly debt payment, excluding your mortgage, by your monthly net income. This debt ratio should not exceed 10% to 15% of your net income, with many lenders viewing 20% as the maximum. If you are in the upper limits or a uncomfortable with your debt level, take active steps to reduce your debt or at least lower the interest rates on it.
Increase your savings.
Calculate how much you are saving as a percentage of your income. Is it enough to fund your future financial goals? If not, go back to your spending analysis and look for ways to reduce expenditures. That may mean reassessing your lifestyle choices. Commit to saving more immediately and then take steps to make that commitment a reality.
Rebalance your investments.
At least annually, thoroughly analyze your investment portfolio:
Review each investment in your portfolio, ensuring that it is still appropriate for your situation.
Calculate what percentage of your total portfolio each asset type represents; compare this allocation to your target allocation and decide if changes are needed.
Compare the performance of each component of your portfolio to an appropriate benchmark to identify investments that may need to be changed or monitored more closely
Finally, calculate your overall rate of return and compare it to the return you estimated when setting up your investment program.
If your actual return is less than your targeted return, you may need to increase the amount you are saving, invest in alternatives with higher return potential, or settle for less money in the future.
Prepare for financial emergencies.
To make sure you and your family are protected in case of an emergency, set up:
A reserve fund covering several
months’ of living expenses.
The exact amount you’ll need depends on your age, health, job outlook, and borrowing capacity.
Insurance to cover catastrophes.
At a minimum, review your coverage for life, medical, homeowners, auto, disability income, and personal liability insurance. Over time, your insurance needs are likely to change, so you may find yourself with too much or too little insurance.
Review your estate plan.
Take a fresh look at your estate planning documents and review them every couple of years. Even if the increased exemption amounts mean your estate won’t be subject to estate taxes, there are still reasons to plan your estate.
You probably still need a will to provide for the distribution of your estate and name guardians for minor children. You should also consider a durable power of attorney, which designates someone to control your financial affairs if you become incapacitated, as well as a healthcare proxy, which delegates healthcare decisions to someone else when you are unable to make them.
If you’d like help evaluating your finances, please call.