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.