Retirement. That vision on the horizon can be hard to prepare for, especially with rollercoaster markets and stubborn economic problems. However, say experts, the key is to start the process now, with some practical steps. According to a recent poll conducted by The Guardian Life Small Business Research Institute of 1,433 small business owners, views on retirement are a little grim. The study found that one in three small business owners see themselves working to age 70 or never formally retiring at all.
Other interesting findings from The Institute’s study include:
- Fewer than 10 percent foresee as feasible, a traditional retirement in which individuals stop working in their mid-60s for a life of leisure
- Two-thirds do not have a written retirement plan, and most of them are not sure if they will create one.
- More than eight in 10 have started to save for retirement, but only half have consulted a financial advisor.
- While the minority will have pensions, real estate and the sale of their business to fall back on, most will rely on their investments, Social Security and individual retirement accounts (IRAs).
Although those findings are focused on small business owners they are probably representative of much of the population. And that should be a call to action!
Consider these five suggestions:
1) Have a Plan. Radon Stancil, certified financial planner and managing partner of Retirement Investment Strategies, in Raleigh, NC, who recently authored a book called Take Control of Your Retirement Plan, says one of his top recommendations is to “make sure you have an income plan for retirement and understand that plan.” He says people need to think of their future finances in terms of three things.
Firs, consider basic income needs – what you will need to pay minimum expenses such as food and housing. “Everyone needs a plan to generate a guaranteed income stream, not from investments per se but from pensions, Social Security, or other assured sources,” he says. This crucial part of the plan needs to consider things like the age at which you will begin to collect Social Security as well as the cost of health coverage or supplemental health coverage before and after applying for Medicare.
Then, the second kind of income you need to focus on is for “wants” rather than needs – things like vacations and eating out. The third category is gifts and legacies – what you might want to leave to your children or grandchildren. “Those last two types of income need could be based on investments because you don’t have to have it always available, so it can be put into income-producing areas,” he says.
2) Understand Risk. A corollary point, says Stancil, is to understand risk. “Most people think of stocks as risky and bonds as risk-free, however both have volatility, which is a form of risk,” he says. Stancil says there’s nothing wrong with risk per se. However, to ensure that a portion of your assets will deliver a guaranteed income, you need to make sure some assets are shifted to a guaranteed income source.
Stancil says he relies on a very simple rule of thumb. “If you take the number 100 and subtract your age, the result is the maximum percentage you should have exposed to risk. “That means if you are 60, no more than 40 percent of your assets should be exposed.” Stancil says, due to circumstances or personal preferences, some people will want to have more or less risk, but the rule of thumb should provide general guidance.
3) Understand Your Retirement Investments. Ignorance is not bliss, when it comes to knowing where your money is, in the view of Brett Goldstein, a retirement planning and pension planning professional for over 20 years. Goldstein, who has appeared on FOX and CNN, and has been quoted in the Daily News and Chicago Tribune, says people mistakenly assume that the company they work for cares about their individual 401(k) account or whether they have enough money to retire on.
Don’t bet on it. He says, if you need proof just look at all the corporate scandals from Enron to Global Crossing. “People who are automatically enrolled in a 401(k) tend to assume less responsibility for their retirement decisions,” he says. As a consequence, some employees assume that since they were automatically enrolled, their investments in the 401(k) are also automatic. When the stock market goes down, they imagine that they are automatically shifted into less risky investments. Similarly, with so many different types of retirement plans to choose from, people can get overloaded with information. “With so many options, people are often afraid to make the wrong choice, so they find it easier not to make any choice. That’s one of the reasons why people don’t save for retirement,” he says.
“Perhaps biblical proverb (Proverb 21:5) says it best: ‘The plans of the diligent lead to profit as surely as haste leads to poverty,’” he adds.
4) Save for More than Retirement. Jackie Warrick, president of CouponCabin.com, an online coupon site that recently conducted a survey about retirement issues, says it is vital to have an emergency fund. In fact, according to a recent CouponCabin.com survey of more than 2,000 adults, more than half (52 percent) said they don't have such a fund. “Saving money in your 401 (k) or IRA is essential to preparing for your future, but what if you have an emergency come up that you need liquid cash for,” she asks? Clearly, you don't want to cash in your retirement plans, or cut back on your contribution, so it is wise to make an effort to have a six-month, liquid account ready to use to help you and your family out in a time of need, she says.
5) Be Realistic. A similar cache of rock-bottom, practical suggestions comes from Derrick Kinney, of Derrick Kinney & Associates, a financial planning firm located in Arlington, TX. He says, as a practical matter, what you want to do during retirement – from elaborate to low-key – Is a crucial factor in determining your savings and investment plans. However, it may also imply consideration of steps such as working past retirement age and delaying your SSI payments to increase your monthly SSI payments when you do retire. Likewise, retirees can benefit from downsizing. Moving into a smaller house can save you money on your mortgage, utility costs, taxes, and maintenance costs, he says. And, as hard as it may be to do, he says you should think about cutting back on spending now.
“The simple truth is you are going to have to cut back on some of your wasteful spending to save for retirement – $50 in a retirement account is worth much more than a $50 dinner,” he says.