A number of recent surveys indicate that many people no longer view 65 as a realistic retirement age and believe that they may find themselves working until they're 80 years old. At the same time, Congress is struggling with budgets and eventually may increase the retirement age to 67 or higher before you can start collecting Social Security benefits. People are living longer, healthier lives. And just when people should be saving more, many are actually saving less in retirement plans due to cash flow problems or fear of the market volatility. When you put all this together, it could be a recipe for disaster as many reach retirement. One thing is for sure, regardless of how things trend or shake-out, all these unknown variables stress the need for a solid savings and retirement plan.
So what should you do?
Identify When You Want to Retire
Look at when you plan to retire and what income you will need to maintain a comfortable lifestyle. Keep in mind that retirement is not an end goal, but the beginning of the next journey in your life. There are different stages in retirement. Early on, people tend to spend more money while they are healthy. As they age, spending may drop and money gets allocated to other expenses such as health care. The only way to plan properly is to quantify your goals. It's one thing to say I plan on retiring when I am 65 or 70. It's another to say that I plan on retiring at 65 and need to have $80,000 a year of income to meet my needs. The dollar amount will help you to see if this is a realistic goal or not, if you will need to work a few more years and/or if you need cut back your expenses.
Establish How Much You Need to Save
Now that you have a general sense of when you want to retire and approximately how much you'll need, the next step is to identify how much you need to save each year to reach your goals. Don't let the headlines and market volatility scare you off. The current times will not last forever. In fact, the current volatility may actually enhance your future returns. By dollar cost averaging each month - a process where you invest an equal amount of money regularly at specific intervals - you actually have the capability to take advantage of the highs and lows of the markets. Over time, this has proven to be a great way to invest, and that's why an employer sponsored retirement plan like a 401(k) offers you one of the best options for saving for retirement. Along with dollar cost averaging benefits, a 401(k) plan often has a matching option, but you have to fund the plan in order to receive the matching benefit. By not funding, you may be missing out on this "free" money from your employer.
Determine Your Risk Tolerance
Your risk tolerance will impact your savings potential. If you are too conservative, you may need to work longer or increase your savings rate. If you're too aggressive, you could find that you've exposed your portfolio to too much risk, which can be especially problematic if you're approaching your retirement age. If you are at least five years from retirement, you shouldn't be afraid to take some risk, but as you get closer to your retirement date it makes sense to be more conservative. Depending upon how close you are to retirement, maintaining a balanced portfolio that is slightly weighted one way or the other can bring you closer to meeting your overall savings goal. Along with your risk tolerance, you'll need to assume a rate of inflation and a rate of return in order to determine where you may need to make adjustments on your savings rate.
Once you've gone through this entire exercise, you may find that tough decisions have to be made like working longer or cutting expenses now to save more for your future lifestyle. You may also find that in going through this, you are not comfortable modeling your own retirement planning strategies. The advice of a Certified Financial Planner professional could really help you out. Regardless, remember that without any planning you will be heading into your retirement journey unprepared. You wouldn't start a long trip without a plan, so look at retirement as a long journey that needs a plan as well.
FPA member Scott M. Kahan, CFP®, is president and founder of Financial Asset Management Corp. in New York City.