(7 minute read)
I’m going to paraphrase some statements that have been shared with me lately, based on a few news headlines that have people worried about their future.
“Social Security won’t even be around when I retire.”
“I won’t retire. I’ll just drop dead in my job.”
And my least favorite regarding long-term care: “Just take me ‘round back of the shed….” and you can guess the rest.
There’s a deep and growing cynicism around retirement planning and healthcare in our retirement years that have many people (my wife included) holding these defeatist sentiments. If all anyone ever does is follow the headlines, then it’s no surprise that these are the conclusions folks land on.
“10 U.S. States Where You Need $1 Million to Retire Comfortably, With 5 in the Northeast1,” and “Do You Really Need $1 Million to Retire?2,” are just a couple examples of headlines that fuel this attitude, and it’s no wonder people have an unrealistic benchmark about retirement. It’s frightening to think about, especially for those starting out, because we’re looking at high costs of lodging, gas, and groceries compared to wages. And for those who are nearing retirement, property taxes add to those fears of “leakage” in their retirement savings. But if you look deeper, past the headlines, you’ll find that these are merely opinions from people regarding retirement and (thankfully) not what industry professionals say, which begs the question, “Where do I start?”
Talk to an Advisor or Planner
I’ve said it before, planning starts by taking an honest look at your current spending habits. This can be an intense exercise depending on your needs and lifestyle including going out, vacations, health and wellness goals, planned surgeries, and the like. The easy items are recurring expenses like utilities while more challenging items are groceries and the cost of gas.
When it comes to planning for long-term healthcare, it’s tricky for anybody, let alone the LGBTQ+ community. My friends in the trans community have additional medical expenses they need to account for ranging from short term and long-term medical care like surgeries or ongoing hormone replacement therapy (HRT). Get a handle on these to get a look at your current state, then look further out at things like the cost of healthcare. This one requires a little research to determine the cost of continuing medical care, premiums, and buffering for unplanned medical expenses. Once you have this in place, then your planner can help direct you in your next steps. Careful planning now prevents the need of grossly revising your plan in the near term.
But what does a planner cost? It can vary depending on your planner or advisor and should be commensurate with the advice you get compared to the growth of your nest egg. For me, as long as costs and inflation are outweighed by the growth of your investment, and your investment risk is within your comfort zone, then you may be functionally in a good spot.
Your advisor should also listen to you. Most of the time, I talk to clients who simply want me to make the decisions for them as long as I’m informing them on my opinion. Other times, they’re very involved in the decision-making process, sometimes going against recommendations. You should be able to talk to your advisor about your wants, too. If your advisor offers a recommendation that you’d like a second opinion on, you should reach out to another advisor. But at the end of the day, your investment decisions are yours, up to and including the decision not to act. Social Security or other state pension programs are a small help, but they’re just that – small.
“I Have Other Needs”
Of course you do! But like most things in our lives, we work, play, clean our homes, care for others, etc. Just because there are recurring needs doesn’t mean you can’t walk and chew gum at the same time. If you save for a vacation or put money away for a house, you still have all of your other expenses to contend with. As part of your budget, you can factor in savings goals as well!
Let’s say you determined that you have $2,500 in monthly expenses and your take-home pay is $4,000 every month. Now let’s build in a modest recurring investment plan of $200 every month – we’ve added this to your budget and it’s now $2,700 every month. You’re sending this value to the future, and if we target 6% on your investment every year (plus or minus market swings), and you’re 25 years old (also assuming retirement in 42 years), then you’ll expect to have approximately $422,000 in your retirement. You need to make sure that money stays there the whole time, you’re making the same monthly contributions, and that your average rate of return is maintained at 6%.
But life goes on. Over the years, you’ve bought a house and presumably a new car along the way, maybe there are kids in your life. Events like this can slow what you put into investments, but over the next decades, you may have pay increases, mortgages get paid off, and your overall cost of living reduces, so now your investments can increase over that time.
It’s obvious that life isn’t linear, so by extension, your investment habits won’t be either.
This is why you should review your financial plan annually with your advisor to make sure you’re still on the right track. To borrow from Stephen R. Covey’s book, The 7 Habits of Highly Effective People: “Begin with the end in mind.” This is an excellent approach to achieving any goal you set, and financial planning is no exception.
Feature Example: ROTH IRA
There can be some pretty creative ways to invest while saving for large purchases like a house. ROTH IRAs, for example, can be a creative tool to invest in your retirement while holding liquid funds. The money you put into a vehicle like this has already been taxed, so you can take those as distributions, tax free. The growth, however, is still taxed at ordinary income rates, and if you do so prior to age 59 ½, then there’s a 10% early distribution penalty that’s collected when you file your tax return. But as the law stands today, you’re able to take up to $10,000 of the growth out for the purchase of a first home without the tax penalty, as long as you’ve held the account for a minimum of five years. You may avoid the penalty for this but you will still have to pay income tax on that, so make sure you factor that in for your return. There are other uses for ROTH IRAs and a complete look on the qualified distributions can be found in IRS Publication 590-B3.
What About Risk?
An investor’s risk tolerance is a big part of any financial plan. Generally speaking, the young have a naturally high tolerance for risk. This isn’t because of any “ten-foot-tall and bulletproof” mentality, but more to do with time horizon. Think of it this way: If you’re 25 years old, you have about 42 more years of your working life to grow your money. That’s because the idea of saving for retirement is to have your nest egg built over the course of 42 years, meaning you can take the market swings because you’re not expected to withdraw those funds until then. Now let’s look at someone who’s 63 years old and wants to retire at 65. Swings in the market put their investments at higher risk of losing while they’re so close to taking distributions. More conservative investing is suitable here, and that might include asset protection by way of fixed, indexed, or variable annuities, or could involve a life insurance play if you want to use your annuity more in retirement while leaving an inheritance. In short, the younger you are, the more risk you can take on while the opposite is true for older investors.
One unique way to reduce your risk is by making systematic contributions to your retirement account. Let’s say you invest $200 every month to the same mutual fund, and throughout the year, the market price of that fund fluctuates. No matter the price of the fund, you always put in $200 every month – when the market is up, down, or flat. Every time you make a contribution, you get more or less shares in a given month than you did in your first month, meaning you’re both buying the same fund at a discount and premium throughout the year. At year end, you average those shares together and come to a number of the average price per share of that fund, assuming that the rate of return gradually increases. This is called dollar-cost-averaging, and it is very beneficial to early investors who like a buy-and-hold strategy. While the purchase price may change as time goes on, your growth in that fund (or dividends) are gaining value for the fund as well, so you have the added benefit of buying into the average of that fund. You can look at a 12-month rolling return of any given investment for an idea of what that looks like, but of course, that doesn’t indicate how it will do tomorrow or five years from now. It’s just to illustrate a point.
For those nearing retirement, you’re likely looking to reduce this market risk. A popular, and better marketed option, is a bank product like a CD or a high yield savings account. These have gained in popularity over the years as a safe alternative, and each bank carries its own rates and conditions for participating, but they are better geared for short term savings and not long-term investing. Say if you needed a place to park money for a year or less for an upcoming planned expense, they’re good. The gains, however, are not tax deferred so you will be taxed on the gains in that year, so be ready to report that on your tax return.
For a longer-term approach, insurance companies offer both fixed and variable annuities that have longer time horizons and can offer growth on your account, tax deferred, meaning you won’t pay taxes on the growth until you withdraw the funds. These have strict rules for keeping the money invested for a period of time, but they also offer other benefits like a death benefit, or at an additional cost, guaranteed income. Like any investment vehicle, there’s a time and a place for anything, so make sure you’re talking to an advisor to find the investment vehicle and selection that’s appropriate to your needs.
In the End
Reach out to a financial advisor or planner about your desire to comfortably retire. Your case, like so many others’, is unique to you, so subscribing to a boiler-plate strategy is not likely to fit your needs, lifestyle, or goals. It all starts with inputs, defining what you would like retirement to look like, and sharing what keeps you up at night. Just keep in mind that when you retire, every day is Saturday. Your expenses may be low, but your discretionary spending may increase, so don’t immediately discount having a part-time job or a side business to keep you active. In retirement, working could be a rewarding activity to give back to the community. Who knows, it might even help you do a little self-actualization.
Schedule a Consultation
Schedule a free consultation with me at Morgan Financial Associates, LLC, to start planning your financial future. From retirement to life insurance to college savings and more, we can help you establish a plan that works for you and your family, no matter how small or large.
The views and opinions expressed herein are those of the author(s) noted and may or may not represent the views of Capital Analysts or Lincoln Investment. The material presented is provided for informational purposes only.
A plan of regular investing does not assure a profit or protect against loss in a declining market. You should consider your financial ability to continue your purchases over an extended period of time.