Have You Set Your Retirement Goals Yet?
You may have dreams of spending your retirement traveling the world, lounging on a beach or playing golf on different courses. Your finances play a big part of making this happen, and it's important to conduct an annual review to see whether you're on track.
"Retirement is paramount on people's lists," says Peter Eckerline, financial advisor at Merrill Lynch Wealth Management. "It's important to have goals and track where you are in relation to these goals because the market, your income and your savings can all affect your retirement."
Most people start saving during their 20s and 30s primarily by taking advantage of 401(k) plans. In your 40s, though, "that's time to do some real number crunching, because at that point, you're getting a better idea of what your retirement will look like: your lifestyle and the price tag on that lifestyle," says Joseph Montanaro, a certified financial planner at USAA.
With life expectancies nearing 80 and above, if you're not financially ready for retirement, you may want to reconsider your plans. To avoid taking a premature step out of the work place, here's how to think about your retirement goals as you go through your annual review.
What do you want to do?
Knowing how you're going to spend your days is paramount, since not going into an office is a big change both emotionally and financially and you have to be ready for this.
"You'll have to replace all those work relationships and what are you going to do with your time," Eckerline says.
Ask yourself if you really want to retire. If you're ready to leave the intellectual challenges and social aspect of your job behind, consider what you'd like to pursue in that time and the lifestyle that you'd like to lead. No matter how successful you were in your career and how much you've saved towards your retirement, if you haven't decided how you'll spend this time, you may not be happy in your golden years.
Plan your retirement budget.
Once you know how you'll want to spend your time, you can begin to develop a budget. Many people in retirement typically spend about 70 percent of what they spend pre-retirement, but some expenses might change. If you don't currently follow a budget, begin by looking at your recent credit card and bank statements.
"All these statements break down your spending by category," Eckerline says. "Figure this out for an 18-month period, and figure out what numbers will change when you're retired."
Your housing costs will change, for example, if you pay off your mortgage or downsize. Along with accounting for fixed expenses such as housing, health care and food, be sure to build in room for any travel, interests or hobbies that you'd like to pursue.
Review your assets, income and investments.
"If you know how long you're going to live, you'll know how much money you need," Eckerline says. "Better health and more active lifestyles are positives, but it also means your money has to last longer. You don't want to run out of savings near the end of your life."
Ideally, a monthly income stream that's adjusted for inflation, such as Social Security, pensions and any rental income, should cover your fixed expenses.
Social Security, which has an annual cost-of-living adjustment, may be a significant source of income depending on when you claim. You can first file at age 62, but your payment will increase 8 percent for every year you delay until 70. The rules can be complicated though, and it's important to understand which benefits you're eligible for. There are different strategies that you can use to maximize your own benefit, as well as that from a current or former spouse.
While an income stream covers your fixed expenses, look to cover travel, hobbies, entertainment and other similar expenses with your savings.
"It's easy to work backwards if you need so much money to supplement Social Security or a pension," Eckerline says.
As an example, if you have $40,000 in expenses that you need to cover, then you need a $1,000,000 portfolio earning 4 percent. If you didn't save enough, working full or part time can alleviate some of the need for such a substantial portfolio. Depending on the benefits that an employer offers, working could also offset other expenses such as health care.
"The idea of being able to work longer is somewhat dependent on your health," Montanaro says. "This can also drive down health expenses, which could be a big deal in retirement."
The next steps.
Whether the numbers match up and your income and assets cover your retirement expenses is the key being able to take this next step.
"If you can't retire, you either have to work longer, or change your retirement lifestyle and spend less money," Eckerline says. "There aren't that many options if you haven't saved enough. Be honest with yourself about this."
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