As a Certified Public Accountant (CPA) who is also a Certified Financial Planner (CFP®), I possess the credentials, experience, and competencies to help guide you to those prosperous golden years. To do this, I can be your independent, trusted advocate for your future financial security. As your trusted fiduciary and advisor, I will also pinpoint strategies that will help make the retirement of your hopes, the retirement of your reality.
Why Do You Have to Take Charge
Why do you have to take charge of your retirement? After all, you’ve been paying into Social Security for just about as long as you’ve been working. Let me give you a few hard-to-ignore reasons to start saving for your retirement now.
- Experts estimate that you will need 2/3 to 3/4 of your current income to lock in financial stability for your post-retirement years. On average, Social Security will only supply 40 percent or less of the income you’ll need in retirement.
- You are likely to live a minimum of 20 or more years after you retire. That’s good news—provided you have the money to afford this longevity.
- If you start saving in your 20’s or 30’s, you can be a millionaire by the time you reach retirement age.
- Even a slight increase in contributions to your retirement savings plan—1 percent or 2 percent—can reap huge benefits 15 or 20 years down the road. [NOTE: “pensions” are not funded by employee contributions]
- If you stay the course, you are likely to maintain or improve your current standard of living in retirement.
Whether you’re a glass-is-half-full person, or a glass-is-half-empty one, the facts and figures I just outlined hopefully have started you thinking about retirement saving and planning. But, as we all know, it’s really easy to fall into the “New Year’s resolution syndrome.” You know how it works. You get all fired up and then a few days or a few weeks later your resolve dissolves and you’re back to square one—or worse.
The strategies I am about to outline will fight that natural, but dangerous, tendency because they will make it easy for you to stay on target and will also—pretty early on in the process—provide measurable results. In other words, you’ll have in your corner EASE and PROOF, two major psychological incentives for sticking with it.
A Successful Retirement
I like to utilize the following simple three-step program for successful retirement planning and saving:
STEP 1: Pinpoint Your Major Sources of Retirement Income
STEP 2: Take a Realistic Look at Your Retirement Costs and Goals
STEP 3: Close the Gap between Income and Goals
Step 1: Pinpoint Your Major Sources of Retirement Income
In this step you will basically inventory all of your anticipated sources of retirement income. As we walk through each of them, consider which ones you have, which ones you don’t, and which ones you should consider adding.
Sources of Retirement Income
Social Security – In addition to retirement income, Social Security provides basic financial support for you and your family during disability and for your survivors following your death.
Each year, about two to three months before your birthday, you receive a statement from the Social Security Administration detailing the facts and figures surrounding your contributions and anticipated retirement benefits. Review and keep this document. It’s a vital piece of information for your retirement planning. Especially relevant is the comparison of what benefits you can expect at various retirement ages. The longer you work, up until age 70, the greater your benefits.
Employer Pension Plan – Examine your pension plan’s provisions carefully and make sure you understand them fully. The most important thing to keep in mind is that your pension may be significantly reduced, or completely eliminated, if you are not with the company long enough to be fully vested. Retiring even a few months too early (or leaving for another position in advance of vesting) could cost you tens of thousands of dollars over the course of your retirement.
Employee Contribution Plans – The most common is a 401(k) plan. These plans are a highly-effective approach to putting money away for retirement. If your employer makes matching contributions, all the better. In addition to accruing retirement income, there are a number of other advantages to 401(k)s and other such plans:
- Your contributions are not subject to tax. If you put $5000 into a 401(k) and earned $50,000 that year, your taxable compensation would be $45,000.
- Employers often offer a variety of investment options, so you can find the investment vehicle or vehicles that best suit your goals and your temperament.
- Some plans allow you to borrow against your 401(k).
- Should you leave your current employer, you can roll your 401(k) over into another tax-deferred retirement plan such as an IRA, or Individual Retirement Account.
But far and away the best feature of employee contribution plans is that you build your retirement nest egg using pre-tax dollars that grow tax free until you withdraw them.
IRAs – These comprise two types of tax-advantaged retirement vehicles: traditional IRAs and Roth IRAs. A traditional IRA contribution can be fully deductible, partially deductible, or totally non-deductible. This depends on whether you or your spouse has retirement coverage with your employer and on the amount of your adjusted gross income. Distributions from traditional IRAs are generally fully taxable and if made prior to age 59-½, are generally subject to a 10 percent penalty. Annual minimum distributions must begin when you reach age 70-½. Contributions to a Roth IRA are not deductible. However, distributions from a Roth IRA are generally tax-free if taken after (1) five years from the year of the contribution and (2) age 59-½. Unlike a traditional IRA, no annual minimum distributions are required after age 70-½. As a result, a Roth IRA can continue to grow tax-free. Consulting a CPA or other financial adviser to learn more about which IRA is best for you could be a critical step in your retirement planning.
Private investments – Provide a supplement to the other sources of income. Here again, the advice from an objective party who does not have an interest in promoting a particular investment can be invaluable. Many clients now see the tremendous value of turning to independent fiduciaries such as CPAs for that kind of advice.
How to Close the Gap.
Finally, as you assess where you will be getting retirement income, you may want to consider a second career. More and more Americans are doing that. Some out of necessity. Some because they feel they want to pursue a passion. Whatever your reasons for a retirement career, you should include it in your retirement scenario. And not just the projected income. You also need to look at the tax consequences. Will it affect your Social Security? Will it kick you up into a higher tax bracket? Will a part-time job or career generate enough income or will you have to consider working full time? These are the types of questions you need to be asking now. You now have an idea where your retirement income will be coming from.
Step 2: Take a Realistic Look at Retirement Costs
The operative word here is REALISTIC. You need to be honest with yourself NOW so you are protected from unpleasant surprises when entering retirement.
Questions to Consider
Here are some questions to consider that will help you get a good picture of your retirement expenses and financial responsibilities. And keep in mind that you are likely to live in retirement for 20 years or more.
- Will you keep or sell your present home? Move? Upgrade? Acquire a second home?
- Will you be carrying a mortgage?
- Will you want to duplicate your current lifestyle? If so what are your annual expenses?
- Will you be paying to educate children and/or grandchildren during retirement?
- Do you plan to make gifts (annual) to your family?
- Will you be contributing to the support of aged parents?
- Which of your medical expenses will be covered – Prescription?
- Dental? Eye care? How would changes in your coverage affect your finances?
- Will you purchase Medicare Part B? Or will you have to purchase “Medigap” insurance?
- Do you plan to travel? How often? Where?
- What will your hobbies cost (for example, golf, tennis, memberships)?
- What expenses will you eliminate, such as a wardrobe for work or transportation?
- What benefits will you lose? A company car? Frequent flyer miles?
- If you plan to embark on a second job or career, what expenses accompany that decision?
Factor in Inflation
While you don’t need to, and at this point can’t, calculate expenses to the last penny, you should sit down with a calculator and come as close as you can to listing all major anticipated expenses.
In addition to asking yourself those questions I just outlined, and more importantly, answering them honestly, there’s another factor you need to take into account as you project your retirement expenses…and that is inflation.
Based on the past ten years, experts say you should figure on an inflation rate of 3 to 4 percent a year. Essentially, if you retire at age 65 with income of $50,000 per year, 20 years later the purchasing power of that $50,000 has been cut by about 45 percent. In other words, to maintain the same lifestyle that $50,000 in income gave you when you retired, you would need about $90,000 annually in 20 years.
Close the Gap
So far you’ve calculated your anticipated sources of income, and you’ve looked at your expenses. The remaining step is to Close the Gap Between your Projected Income and Your Retirement Goals.
Now we turn plans into action and ideas into reality. If you are like the majority of Americans, you will discover that there is a gap between your retirement goals and the money you’ll need to support them.
Saving and the Power of 100
Saving even a small amount with regularity over a long period of time can have a profound impact. Let’s look at how powerful that $100 really is. After 5 years earning 6 percent, you’ll have $6,977. After 20 years, $46,204. After 30 years, $100,452. If you can find a mix of investments that earn you 8 percent, you’ll have $7,348 after 5 years; $34,604 after 15 and $149,036 after 30. Now, if you can set aside more than $100 a month, the savings will be even greater. You see my point? It is NEVER too early and NEVER too late. What’s more, you would not have to look very hard to find around $3.25 a day to put away for your retirement. $3.25 a day is all it takes to set aside $100.00 a month. That’s about the cost of a large, designer coffee. I’d like to spend a moment now talking about the kinds of investments to consider. As we discussed earlier, individual investments are often pivotal in closing the retirement income gap.
Remember to Consider…
Whether you make your retirement investment decisions on your own or get professional assistance, there are a number of considerations you should keep in mind:
- Your current age;
- Your desired retirement age;
- Your tolerance for risk;
- Your liquidity requirements; and
- Tax implications now and at retirement.
Tax-Advantaged Retirement Investments
First, the tax advantaged: U. S. Treasuries, as they are called, are the safest securities around. They are backed by the “full faith and credit” of the United Sates, so the risk is practically zero. But these investments are not safe from the impact of inflation. In fact, long-term studies show that the real, inflation-adjusted returns are close to zero. Nevertheless, Treasury securities are considered to be a key component in a well-rounded portfolio. Treasuries may be purchased directly from Federal Reserve Banks or the U.S. Treasury, or indirectly through a mutual fund. The income is exempt from state income taxes. Municipal bonds, issued by states and cities, may also be purchased directly or through a mutual fund. They are exempt from federal and state tax in the state of issue. For those in higher tax brackets, they can be especially attractive. Annuities, investment contracts sold by insurance companies, are also tax advantaged. The government sees them as a safe and convenient way to build retirement savings while contributing to a more stable and secure society. Generally, earned income on the annuity escapes taxes until the annuity is paid out, either in a lump sum or installments. Premiums are not deductible, but the good news is that, unlike IRAs, you are not limited to a set annual contribution.
Taxable Retirement Investments
These investments should be included in your personal retirement assets for a number of reasons: (1) they often carry larger after-tax returns; (2) you have a greater degree of control in buying, monitoring, adjusting and selling them; and (3) there are no withdrawal penalties, should withdrawals be necessary.
Certificates of Deposit or CDs are fixed-income investments with higher interest rates than saving accounts. Maturities range from 30 days to several years and they are insured, so risk is minimal. However they do follow the old paradigm: “the lower the risk, the lower the gain.” And at this point in time, CDs come nowhere near keeping up with inflation. Corporate bonds also generate a fixed income, but they usually have higher returns than CDs, and not surprisingly, a bit greater risk. Corporate stocks usually offer the greatest hope of significant returns over the long haul, especially when considering stocks that offer BOTH dividends and the potential for increases in share price. The best way for an individual to buy stocks is through mutual funds. Mutual funds provide immediate diversification for even the smallest portfolio and you can take advantage of the knowledge and skills of an investment professional whose job depends on the fund’s success. Of course, there is risk. The market goes up and down. Funds managers are fallible. However, the good news is that there are so many funds – and so many kinds of funds. As an independent fiduciary, I can provide you with the professional objective guidance that you will need to find the right mix to match your investment goals to ensure that you don’t have all of your eggs in one basket.
Beware of Common Pitfalls
As you investigate your various investment options, here are some common pitfalls to be careful of:
- Get rich quick schemes. If you are an older investor, you could be especially vulnerable in the hope of making up for lost time.
- Over-caution. Remember, your investments need to keep ahead of inflation. Just putting money in the bank will not do the trick
- Not enough diversification. You need a variety of investment vehicles to protect yourself from the idiosyncrasies of a single industry, mutual fund or broker.
- Tapping into your retirement investments. Your retirement investments should be sacred. They are for one purpose and one purpose only. If you start to tap into them, you are literally sabotaging your future. Of course, you do need an emergency rainy day fund, but your retirement investments are NOT it.
Protect Yourself in Retirement
To sum up, there are five things you can do easily, quickly and effectively to protect yourself in retirement.
- Put aside $100 extra a month. As it grows, consider how you will make it work harder for you.
- Diversify. Be sure your investment strategy includes a mix of income builders for retirement which might include: government securities, mutual funds, bank accounts, and CDs.
- Take advantage of anything and everything your company offers to help you save for retirement.
- Use tax advantaged vehicles such as IRAs, annuities and municipal bonds to help you increase your income BOTH now and later.
- FINALLY, start right now.