Consider this: In 1963, a retiree had to pay $0.22 for a loaf of bread. In 2013, it’s close to $2. A gallon of gas in 1963 ran you about $0.30. Today, you’re paying over $3.50. And in 1963, if a retiree wanted to see the the Rolling Stones in concert he’d probably have to shell out a couple of bucks.Today, it will cost him more than a couple of Benjamins unless he wants to sit in the nosebleeds.
The fact that the Stones still tour may be due to the increased health and vitality of all seniors. That’s the good news. If you’re financially secure in your golden years and you stay in good physical shape, you’re going to be able to golf, jog, hike and travel the world for a very long time.
Of course it might also mean that Mick and Keith didn’t make the best retirement planning decisions. You don’t want to be punching a clock in your 70s like them do you? No. So take a second and review these 10 smart choices you can make today to put yourself in great shape for retirement.
1. Choose To Put 10% Of Your Paycheck In Your 401(k) Plan
The Nile River isn’t as long as the list of excuses you have for not doing this. You’re trying to pay off student loans. You’re trying to save for a house. You’re saving for a car, a wedding or a pair of Google Glasses as soon as they hit the market.
The fact is your employer-sponsored retirement savings plan is still the most convenient, powerful way to save for retirement. If your company offers a matching contribution then you should be contributing at least enough to get the maximum from them. Then try to increase your contributions a little bit every year. Remember, these are pretax contributions so the government is helping out by contributing some of the money you would have had withheld anyway. Talk to anyone who has been in a 401(k) plan for a long time and they’ll tell you two things: 1) You won’t miss your payroll deductions as much as you think you will; and 2) There is no way you’ll accumulate a sizable nest egg any other way.
2. Choose To Design A Suitable Investment Portfolio
Deciding how much to save is the easy part. Choosing where to invest your money gets a little trickier. Just remember this, it’s not about finding the hot funds or getting a good tip on a stock. If real estate is about location, location, location, then retirement investing is about diversification, diversification, diversification.
Most companies who provide investments or 401(k)s provide what are called suitability or risk-tolerance quizzes. You answer a few questions and then they’ll give you some sample portfolios; guidelines to follow when deciding how much to put in which funds. More recently, many mutual fund companies offer “target date” funds. The idea behind these funds is that you pick one fund based on a year close to when you’ll retire (say 2040) and that company will diversify your assets for you and gradually adjust your holdings to make them more conservative as you get close to your target retirement year. If you’re working with a financial advisor on other aspects of your financial life (life insurance, disability insurance), they might also be a good resource for helping make sure your portfolio is appropriate for you.
3. Choose To Meet With A Financial Professional
If you have a scratchy throat or a slight pain in your lower back, it’s OK to check WebMd to see if you can diagnosis your condition by yourself. But if your symptoms persist for more than a week, then there is a good chance you’re going to consult a doctor.
Q: How long is your retirement going to last?
A: Much longer than a week. Much, much longer.
Don’t be intimidated to sit down with someone whose living is to help people prepare for a comfortable retirement. Talk to your friends and family first. Find out if anyone knows a financial representative who is experienced and trustworthy. Or just contact a Farmers agent and ask about their financial planning services and they’ll help you with anything you need. Some financial instruments are complicated and you should have an experienced professional explain them to you.
4. Choose To Purchase A Suitable Amount Of Life Insurance
Think life insurance isn’t part of retirement? Think again. Many people are discovering the flexibility that permanent life insurance offers to a well thought-out retirement plan.
Unlike term life insurance, which is typically designed to expire in your retirement years, permanent life insurance stays in force. That kind of guaranteed death benefit allows you to spend your retirement savings freely without worrying about leaving no estate for your children or grandchildren.
Furthermore, the cash value of your policy can be accessed on a tax-favored basis, giving your some added flexibility in retirement.
5. Choose To Open A Roth IRA
The beautiful thing about saving with your employer’s 401(k) plan is that it allows you to save pre-tax money and accumulate investment gains on a tax-deferred basis. That’s pretty powerful. The downside to all of that is that Uncle Sam is going to collect taxes on every dime of that money at some point. If you do a really nice job of saving you might find yourself worrying about getting hit with a huge tax bill when you start to withdrawal from your 401(k) or traditional IRAs in retirement.
A Roth IRA is a good way to hedge your bets. If you’re eligible, you can contribute after-tax dollars to a Roth IRA and your investment earnings will accumulate tax free. If you have a long time to go to retirement, that’s a lot of years and a lot of tax-free money that can build up. That will give you some flexibility in retirement; the ability to withdrawal a large lump sum without having to worry about the tax implications. And you may not need that money right away in retirement, so it can stay invested and continue to accumulate tax free. If you pass away, you can pass it on to your heirs tax free. I’m sure they’ll be grateful.
6. Choose To Live Within Your Means
Start this habit today. It is the foundation of every prudent financial plan for everyone, everywhere at all times. The fact is that every person -- man or woman, rich or poor, young or old -- can get themselves into huge financial trouble when they spend more than they earn. Google "Nicolas Cage" and "bankruptcy" if you don’t believe me. Just look at the awful movies he’s had to make to dig himself out of the hole made for himself by spending too much.
This concept takes on heightened meaning for retirees. Most people in their 80s don’t have much earning power. If you spend too much in your early years of retirement and run out of savings, then you run out. Then you’ll be calling your kids for money and how demeaning will that be? Start sticking to a budget now.
7. Choose To Understand Annuities
Sometimes annuities get a bad rap from celebrity financial gurus with
really bad hairdos. Like a lot of financial instruments, however,
annuities sometimes make sense and sometimes they don’t.They can come in handy when it comes time to start withdrawing from your retirement accounts. A big worry many retirees have is that they’ll outlive their life savings. To prevent that, you can purchase an annuity that will give you a lifetime stream of income. That’s real security and peace of mind. This isn’t something you want to shop for on your own, however. You’ll need a financial advisor to explain them to you.
8. Choose To Read Your Social Security Statement Every Year
Think the government will take care of you in retirement? The next time you get a social security statement in the mail, take a minute or two and read it. What’s that? You haven’t received a social security statement in the mail recently. Yes, because the government stopped sending them out a few years ago. It seems they couldn’t afford the postage. And you thought the social security system was in good shape?
In fact, social security should be around for you in some form when you retire. (Hard to imagine the politician who would risk taking that benefit away.) But don’t be surprised if the full retirement age gets pushed back. Currently it’s 67 for anyone born after 1959. You can go on the social security website, set up an account and view your estimated monthly benefit. The average payment in 2012 was $1,230 per month. Ask yourself if that amount is enough to live on in retirement. Then go and increase the contributions you make to your retirement plan.
9. Choose To Rollover Your Retirement Account When Changing Jobs
These days people change jobs much more frequently than in years past.
With most employers offering defined contribution pensions (like
401(k)s) many workers have to make a decision about what to do with the
amount they’ve accrued when they do take on a new position. Here’s what you should not do: Cash it in. It’s very tempting. You might have some bills you’d like to pay off or you might think it’s a good idea to use your 401(k) money towards the purchase of a new car, but there are big downsides to doing that. First of all, you’ll pay income taxes and a 10% penalty on the amount you take out of your retirement plan (if you’re younger than 59½.). So, a lot more of that money will go to the IRS than you think. Then you’ll miss out on any future earnings that money would generate. Many people are finding themselves in the middle stages of their career, woefully behind the eight ball with regards to their retirement savings because they cashed in their 401(k) savings in their younger years. A direct rollover to an IRA or your new employer’s retirement plan will help you avoid that big tax bill and keep you on track for retirement.
10. Choose To Keep Your Cool When The Stock Market Takes A Dive
Do you remember way, way back in those crazy days of the latter part of 2008? Seems like just yesterday, doesn’t it? The U.S. economy teetered on the edge of a cliff. The headlines were unthinkable (Lehman Brothers going out of business? Seriously?) and the stock market dropped. Then it dropped some more. Then it kept on dropping.
And the people who really got hurt were the ones who were within a few years of retirement and had too much of their savings in the stock market. It was not unusual for a $300,000 401(k) account balance to drop below $200,000. Many near-retirees were looking at working a few more years than they wanted to. The other people who really got hurt were the people who moved their money out of the stock market after it took that dive. This was especially the case if they didn’t get back in to enjoy one of the sharpest rebounds the market has seen ever seen -- between March and September of 2009.
Today the market is at an all-time high, but I predict it’s going to drop again. Then it’s going to go back up. Then it’s going to drop. Don’t ask me when and how much. Just know that if it does take a dive and you have more than 10 years to go until retirement then you don’t need to panic. Riding that roller coaster is still the best way to enjoy long-term growth in your retirement account.
