Remember when employers used to hand out gold watches and generous pensions to workers when they retired?
Those traditions are fading fast. People rarely wear watches anymore, for one thing. Employees are less likely to stick with one company for their entire career, for another. And fewer and fewer companies offer defined-benefit plans, even to longtime, loyal employees.
Still, it might make sense to revive the timepiece tradition with one major metaphorical modification: A clock could be delivered before workers' paychecks stop - you know, as a little reminder that time is ticking and it might be wise to put a detailed financial plan in place prior to facing 20 to 30 years in retirement.
Americans are living longer. According to the Social Security Administration , a man reaching age 65 today can expect to live to age 84. A woman turning 65 today can expect to live to age 86.5. And those are just averages. About one in three 65-year-olds will live past 90, and one in seven will live past 95.
A written plan would help them mentally prepare for what's to come and hold them accountable for their financial decisions.
Would the countdown clock idea work? I don't know. But I worry about some of the pre-retirees I meet. The investors who admit they chew their nails as they watch the market -- but don't have a plan. The savers who regularly stash money in various accounts -- but don't have a plan. The people who tell me they don't need much -- they just want to leave some money for their kids -- but don't have a plan.
If you're nearing retirement, it's time to make the most comprehensive plan you've ever had in your life. You can create your own or work with a trusted financial professional who can help guide you to your goals. Either way, here are three things to keep in mind as you go:
Preservation vs. accumulation
For most of your working years, your goal probably has been to accumulate as much money as possible -- and investing a large portion of your portfolio in the stock market can be a good way to help build wealth. But when you're near or in retirement, and you have less time to recover from a big market loss, you'll likely want to reduce your exposure to risk. If the market corrects -- or worse -- and you're forced to sell your investments regardless of the price per share in order to fund your retirement lifestyle, the consequences could be devastating. This is called "reverse dollar cost averaging" or "sequence of returns risk," and a worker's financial position can vary dramatically depending on what happens in the markets just as he or she retires.
If you've won the game and saved enough money for retirement, why put it all at risk? As you develop your plan, be clear about how much you'll need to achieve your short- and long-term goals -- and what you are (and aren't) willing to risk in order to achieve those goals.
Retirement plan vs. retirement portfolio
Most people go into retirement with a 401(k) or traditional IRA, and maybe some kind of brokerage, savings or Roth account, an annuity or real estate investments. And that's all great. But a drawer full of paperwork isn't a comprehensive plan. I often compare it to an orchestra that's tuning up before a concert: The instruments are all there, but it's just noise until the conductor takes the podium and indicates the right tempo. Your written plan should tell you which accounts -- 401(k), Roth, savings -- you should draw income from first.
You also should decide when and how you'll claim Social Security to help maximize that benefit and how you'll deal with required minimum distributions (RMDs) when you reach age 70½. You'll need to look at market risk, inflation risk and tax efficiency. (I'm always surprised by how retirees overlook the tax consequences of their decisions. By managing withdrawals and avoiding the possibility that you'll be bumped into the next tax bracket, you can help save on your tax liabilities.) It's also important to maintain some flexibility, in case your situation changes through the years. Whether or not they were married earlier in life, many women will be single at some point during their retirement years. With that in mind, I always urge both spouses to stay involved in the planning process.
Investment adviser representative vs. insurance agent
As you near retirement, you'll probably receive invitations to talk about your financial future with various financial professionals. In the process, you might hear from insurance agents and from investment advisers who feel a retirement plan should include more than insurance products. There could be some benefit from including both investments and insurance products in your retirement strategy. Keeping some stocks in your portfolio may help you deal with inflation down the road, and insurance products, such as annuities, can provide guaranteed income for those who want more stability. A financial adviser, who is licensed to offer both, can assist you in choosing the best products for you within the context of your overall plan.
As you search for someone to trust with your nest egg, consider independent advisers, who aren't tied to one investment or idea, and have access to a variety of financial vehicles to assist you with your strategy.
Ultimately, the plan you create should be able to meet your needs so that you feel confident that you're going to be OK.
I've had prospective clients show me plans that say they have a 90% chance of making it through retirement. And I ask them, "If you and I were about to fly to New York, and you learned that out of the 100 people boarding the plane, only 90 were going to make it, would you get on?" Of course, the answer is no.
So, is it OK to have a plan that only makes you feel like you have a 90% chance of success?
If you, or the professional you work with, haven't yet come up with a detailed plan for your retirement, remember: It's time to protect your future.
Kim Franke-Folstad contributed to this article.
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