Retirement
can mean uncertainty if you haven’t taken steps to plan for it appropriately.
In a June 2018 Bankrate survey, 61% of Americans admitted that they still don’t
know how much they’ll need to save to retire.
Getting your target savings number right
is an important part of the retirement
planning process, but it’s just one thing to consider. Making sure
you’re able to achieve your goals after you’ve retired is another.
According to Prudential’s 2018
Retirement Preparedness Survey, the biggest goals for retirees and pre-retirees
include traveling, spending more time on leisure activities, starting a
business or a new career, volunteering and going back to school. Your vision
may feature different goals, but regardless of what you want to accomplish, the
start of retirement is not the time to take your foot off the gas when it comes
to planning.
“For many, going into retirement after
years of planning and saving can give one the feeling of satisfaction that
they’ve done enough, so now 'let’s enjoy,'” says Stuart Chamberlin, president
and founder of Boca Raton-based Chamberlin Financial. “The thought of saving is
behind them and now’s the time to enjoy the so-called 'golden years,' but this
mindset can have a detrimental effect on their financial security.”
If you’re retired or nearing retirement,
it’s important to keep your goals – and your plan to achieve them – firmly
in sight.
Use the Bucket Approach to Plan Spending
As you move from saving to spending in
retirement, consider how you’ll divvy up your assets. David
Zavarelli, an independent financial advisor and certified financial planner
based in Danbury, Connecticut says splitting assets into individual “buckets” can
help you better plan spending.
“The first bucket is your short-term,
which is two years or less,” Zavarelli says. “That money should be in cash or
very short-term bond
investments.”
The middle bucket is your three- to
six-year bucket, which Zavarelli says you’d want to invest in a portfolio with
a 50/50 split between stocks
and bonds. “This bucket will periodically replenish the short-term cash need
bucket,” he says.
The third bucket is your long-term
bucket, which may have more equity
exposure, potentially allowing for more growth. “The thought here is that since
it’s intended to be longer term, there is less concern about short term market volatility,”
Zavarelli says.
Once you’ve set up your buckets for
spending, you can then decide which goals each one will fund. For example, part
of your short-term bucket may be earmarked for emergency expenses. Another
survey from Bankrate found that 25% of Baby
Boomers have no emergency
fund. Keeping three months to a year’s worth of expenses in a liquid
savings
account can help you cover any unexpected costs you might encounter,
such as a car or home repair.
The middle bucket could be what you draw
on to fund your lifestyle goals, such as starting a business or traveling more
often. For example, the typical retiree spends $11,077 per year on vacations.
Your retirement travel spending may be higher or lower. Reviewing your assets,
income, savings rate and investment returns can help you determine how much you
can afford to spend on travel, and where that money will come from.
The third bucket can be helpful in
planning for what can easily be your biggest retirement expense: health care. A
couple retiring at age 65 in 2018 would need $280,000 to pay for medical
expenses in retirement, according to Fidelity Investments. That figure
doesn't include the additional cost of long-term care.
“You may be healthy today, but
statistically, your chances for unexpected medical emergencies will increase,”
Chamberlin says. “Having some flexibility in your planning to adapt to life’s
unexpected curve balls would be wise.”
Prioritize Needs and Wants
As you shape your financial plan in
retirement, consider what’s most important. Retirees need to figure out what
constitutes a spending necessity in terms of meeting basic living needs, any
“wants” they have that aren’t necessarily critical to daily survival and what
falls in to their “dream” category, says certified financial planner Ilene
Davis.
Then, do the math. “Figure out how much
is needed for each and have that much set aside for that purpose,” Davis says.
Leave room for new needs that can arise as you move through retirement, such as
health care. Most importantly, be realistic about what you need to enjoy a
comfortable lifestyle.
“Many people think they need more than
they really do,” Davis says. “It’s a matter of truly understanding what
lifestyle they can afford and finding happiness to enjoy that desired
lifestyle.”
If there’s a gap between your savings
and income,
and your goals, think about how you can close it. That could mean reducing
spending, delaying your retirement date or working part-time once you’ve
officially retired. All three could help to bolster your savings and increase
retirement income.
“It’s still wise to maintain a saving
mindset in retirement and have a plan to combat things like inflation,
which would include the rising cost of health care,” Chamberlin says. “ On the
income side, annuities
could help to create an additional income stream.
Chamberlin says to consider an annuity
with a built-in income rider “that can correlate your income with gains on an
index.” And, “having an increasing payout option over time can help with the
increased cost
of living.”
The Bottom Line
Setting goals, creating an action plan
for achieving them and reviewing it regularly throughout retirement can help
keep your finances on solid ground.
“The most important step a retiree or
pre-retiree can take is to educate themselves on the intricacies of building a
concise financial plan,” Zavarelli says.
An advisor can
guide you through the process if you’re not sure where to start. While you’ll
pay a fee for professional advice, “the investment up front can save far more
down the road, and it can provide the peace of mind that can allow one to enjoy
the retirement they deserve,” Zavarelli says.
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