Plan for a Long and Prosperous Retirement

Retirement may seem far away to many of us, especially when you just graduated from college.  Preparing for that distant future often isn’t high on the financial priority list. But to get where you want to go, you must start building retirement funds. You need to act now, so that with some smart planning, you can make your time and money work for you. Here are a few steps that can help you get started.

Define the Retired You

List your objectives for the years (which can span over three decades) when your time is your own. Try to stick to practical expenses, such as traveling the world, writing books, spending time with family and friends, and becoming the person you’ve always dreamed of.

Create a Retirement Plan

Work closely with your CPA to calculate how much you need to save in order to live the lifestyle you envision. A good retirement plan considers factors such as current savings, future income and expenses, desired standard of living, and unexpected events (including the potential costs of health care).

Ensure a Source of Income

Experts estimate that a comfortable retirement will require at least 70-80% of your current income. Without the monthly paycheck, you need other financial resources that will allow you to maintain your desired standard of living. To keep a steady cash flow, start funding your pension, retirement and savings accounts, and portfolio of stocks and annuities. You can also invest in real estate for home equity and rental income. Another critical decision concerns the timing of your social security benefits.  If you begin receiving benefits before your normal (or full) retirement age, you will receive a reduced benefit. You should compute the effects of early or delayed retirement to see what works best for you.

Start Now

Tap into the magic of compound earnings. The sooner you start saving and the longer you stay invested, the more you can increase the value of your portfolio (see chart below). One of the easiest ways is enrolling in an employer sponsored retirement plan, such as 401(k), and contributing the maximum amount allowed (which is $18,000 in 2016). Find out information about the plan, such as how much you would need to contribute to get a full employer matching contribution, or how long you would need to stay in the plan to become vested.  Your contribution will lower your current taxable income while increasing your future earnings. Automatic income deductions through payroll make it easy to participate. Another option is an Individual Retirement Account (IRA).  You can contribute up to $5,500 a year if you are under 50, or $6,500 if you are 50 or older. An IRA also provides tax advantages.  The tax treatment and withdrawals will vary depending on whether it’s a traditional or Roth IRA.

Invest Wisely

If your retirement portfolio is too heavily focused on conservative fixed-income investments and the cost of living rises faster than your savings, you may end up losing money to inflation. If you invest too aggressively to build wealth more quickly, you may become exposed to excessive market risks. This is why you need a strategy of diversification. A portfolio of multiple securities and various asset types can improve return and reduce the risk of suffering a significant loss. Consult portfolio managers who utilize proper asset investment allocations and demonstrate consistent market returns, while keeping volatility to a minimum.

Don’t Touch Your Retirement Savings

Resist the urge to withdraw from your retirement funds, whether you’re temporarily unemployed, sick, or eyeing a new car.  In addition to losing principal and interest compounding, you’ll have to pay income taxes and may be subject to additional 10% early withdrawal penalties. Keep in mind that a short-term fix can result in much bigger long-term damage.  Also, remember that retirement funds are solely for your own retirement use.

Evaluate Your Health

Health is wealth.  This is true for your entire life, but retirement would be more painful if you finally have the time and money to do what you want, but you physically cannot. The biggest and most expensive unknown aspect of your golden years is health care.  To prevent or manage health issues, schedule annual checkups and dental appointments; commit to eating healthy, exercising and getting enough sleep, as well as sharpening your mental skills with games and books. To maintain both your physical and mental health, stay in close contact with family and friends.

Expect the Unexpected

Family crises, long-term residency in a nursing home, higher cost of living expenses, lower than expected social security or pension benefits, a sudden drop in the financial market, and/or natural disasters can wreak financial havoc. Thus, you should keep a portion of your retirement portfolio in a cash fund to avoid having to liquidate investments in case of emergency.

Take the First Steps

“It’s never too early nor too late to start saving for retirement.  But it’s imperative to devise a plan and stick to your goals” suggests Karen Wong, a senior tax manager at Buchbinder. A good retirement plan helps you balance the competing demands on your current income, such as raising your family, paying for college, enjoying life now, as well as saving for retirement. Karen advises “You can start out small and gradually increase your contributions.  Make saving for retirement a priority so that you can live a long, healthy and prosperous retirement life.”

© 2016

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