Imagine packing up your car for a trip, backing out of the
driveway and you realize you have no gas or destination. Of
course this would never happen because you would have spent
time planning your trip, getting the needed maps, setting the
GPS, and filling up the gas tank before leaving. You also made
sure you had enough money for an unexpected side trip or car
troubles. In other words, you set your goals, had a plan and an
emergency fund set aside. So how do you relate this to
retirement planning?
A recent study indicated that 49 percent of people
don't save for retirement. Even those saving today may be
planning on extending their work years since they fear they
won't have enough assets at retirement. Here are three easy
steps to get started on your retirement journey.
Create your roadmap
Create your trip towards retirement. View retirement as the
goal and plan accordingly. What age do you want to retire? How
much income will you need? What stops will you make along the
way? Start a family? Buy a house? Are there others dependent
upon you such as a parent? Obviously things will change between
now and retirement. But not planning will only lead to failure.
You need to address your goals and make the needed adjustments
along the way.
Start early and often
During life's journey, many things will change. Chances are
you won't know what type of retirement lifestyle you will want
until you get closer to retirement. Some people may not figure
it out until they are a few years into retirement. The one
thing you do know is that if you are like most people,
eventually you will want to retire. It's never too early to
start saving for retirement. When you get that first job, put a
few dollars away in a retirement plan. Imagine the 16 year old
child working part time and saving just $100 month until age
66. At 5 percent rate of return, that $100 per month will be
worth $266,865. Let's assume that money was put in a Roth IRA,
and then when they begin withdrawing, the money will be
completely tax free. Eventually, the 16 year old will be making
more money and be able to save more than $100 per month.
Periodically look at your budget and make sure you are paying
yourself first by putting money away for the future. As your
journey continues, chances are there will be bumps along the
way that may make it difficult to save. If you started early,
you should be able to get through the rough stretches of road.
The lesson learned here is that even small amounts can build up
over time. The longer you wait the harder it becomes to build
the retirement nest egg you need.
Taking risk
Based on the experiences of the past few years, many
investors are afraid to lose money. By not taking risk, you may
be losing money without realizing it. As inflation goes up each
year, you need your money to keep pace, otherwise you lose
buying power. So even though the principal is intact, the
purchasing power will be decreasing. When you are younger take
higher risks with money set aside for retirement. As you get
older, start to be more conservative. Keep in mind that people
are living longer so you should keep some equities in your
portfolio even in retirement.
Being that you will have different goals to plan for at the
same time, money earmarked for shorter term goals should be
more conservative. As a rule of thumb, money that you will need
in two years or less, should probably be kept in a safe
savings or money market account. As you look at your other
goals, diversify accordingly. By following this guideline, this
should lead to a diversified portfolio.
Retirement planning can be difficult, but needs to be
addressed. Reach out to a CERTIFIED FINANCIAL PLANNER™
professional from FPA who can assist you in planning your
life's journey.
FPA member Scott M. Kahan, CFP
®
, is president and founder of Financial Asset Management Corp
., a fee-only Wealth Management firm in New York
City.