5 Great Paths to A Successful Retirement
Updated: Nov 16, 2020
Achieving your financial goals doesn’t just happen by itself. It takes a plan, implementing the plan, following the plan, and when necessary, adjusting the plan.
Simply put, failing to plan is planning to fail. Take a look at these five powerful tips:
1. Regularly savings is critical. Once you begin an automatic payroll deduction into a retirement account, you won’t miss it. When I first started saving in my company’s 401(k), my initial goal was to put 10% of pretax income in my 401(k).
But that seemed like a mighty big chunk of cash, at least in the beginning. So, I started with 4%, raised it to 7% after three months, and bumped it up to 10% three months later. Taking baby steps was much easier than attempting to summit the peak in one leap.
I can’t overly emphasize the importance of capturing your entire company’s match. Many company’s that do offer employer retirement benefits usually include a FREE match. For example, they may offer a 5% match. Why wouldn’t anyone take advantage of that deal? That’s like getting a FREE 5% guarantee return. Don’t leave free cash with your employer.
2. Start as early as you can. For most college graduates and new employees, discussing retirement is like having a conversation with someone from another planet. That’s simply the case for many young people. The mistake is that they aren’t really thinking about this at this stage of their life.
But we all know the magic of compounding. As with most older adults, the savings we socked away when we were younger has paid big dividends.
Let’s look at an example. Kevin is 28 years old and plans to save $500/month or $6,000 per year until he retires at 65. With an annual return of 7% (assuming annual compounding), Kevin will have amassed $962,024 when he turns 65 years old. Total contributions: $222,000.
Now, let’s see what Cindy did. She decides to put away the same amount every month. Cindy is 22 years old and will save for 43 years until she reaches age 65. While her time to contribute is only an additional six years, her decision to start early is rewarded with a portfolio of $1,486,659. Total contributions: $258,000.
Because Cindy started sooner, the additional $36,000 amount she contributed over those six years gave her an additional $524,635 at age 65!
3. How much will I need at retirement? Again, much will depend on your individual circumstances. Your retirement expenses and lifestyle will dictate your portfolio needs. The objective now is how to replace your old salary.
An old rule of thumb that you’ll need 70% of pre-retirement income may not suffice for many. For example, will you still be paying on a mortgage after you retire? Or, do you plan to downsize, which may reduce or eliminate monthly mortgage outlays?
Be certain to know what your Social Security Benefits and Pension(s) are before you retire. Some people are surprised of their newly income when they no longer have a salary coming in. Personal savings, Social Security, and a Pension(s) are key steps to securing your retirement that will inevitably dictate your retirement lifestyle.
4. How do I find the right mix of investments? What worked when you were 30 years old probably isn’t appropriate today. Risk tolerances changes as we grow older. As an investor, we would need to know-are you: aggressive, conservative, moderate or a combination of each?
While our advice will vary from investor to investor, we can offer broad guidelines. Furthermore, retirement may be broken into different stages, which may require adjustments to the plan.
Some investors decide its best to take a very conservative approach. You know, “I can’t lose what I’ve accumulated because I don’t have time to recoup losses.” But that has its drawbacks. For starters, you don’t want to outlast your money. Equities, which have historically offered more robust returns, may still be an important part of an investment strategy.
Others may be swept up by what might be called “the hot stock of the day.” Over the years, an upward trend in the stock markets may encourage investors to load up and take on more risk. However, a comprehensive financial plan helps remove the emotional component and risks that can creep into decisions. Make sure you seek professional advice before treading alone.
5. I’ve saved all my life. How do I begin withdrawing from my savings? I know, it’s a complete shift in the way you’ve been doing things. No longer are you socking away a percentage of each paycheck. You have retired! Instead, you are now beginning to or seeking ways to live off of your savings.
First, if you are required to take a required minimum distribution from a tax deferred account once you’ve reached 70 1/2 of age. Take it because if you don’t, you will have to pay a fee of 50% of the required minimum distribution amount. Remember, this is only required on IRA accounts.
Next, consider interest, dividends and capital gains distributions from taxable investments, which continues to tax shelter assets in retirement accounts.
If additional funds are needed, consider withdrawals from your IRA or other tax-deferred accounts. If you are in high tax bracket, you may consider pulling from your Roth if you have one. Those in a lower tax bracket could leave the Roth alone and take funds from their traditional IRA.
Let me reiterate that many of these principles are simply guidelines. One size does not fit all. Plans we suggest are tailored to one’s specific needs and goals. Planning for your retirement is essential because you more than likely will do this only once. Having a financial plan in hand is a great strategy as you prepare to take that leap into the retirement world.