It’s not exaggerating to say that your financial plan for retirement begins the first day on your first job.
“Starting younger has been proven time and time again that it’s the easiest way to have a successful retirement,” said Susan Herendeen, senior fiduciary officer for ESL Trust Services LLC. “… One of the things I like to remind individuals is you could potentially spend as many years in retirement as you were working.”
Actually, your post-work life could be longer than the time you spent on the job.
Slightly more than one-third of older workers retired earlier than they thought they would, according to research published in February by the Center for Retirement Research at Boston College. Health problems – whether they struck the worker or required the worker to care for a family member – was a major reason for leaving the workforce. Losing a job and not finding a new one was another important factor in why 37 percent of older workers called it quits ahead of schedule.
Having a plan that takes into account the possibility of sudden early retirement is crucial, said certified financial planners.
“You plan for the unexpected and you make choices around that,” said Herendeen. “You’re problem-solving for wants and needs.”
The best time for figuring all that out is when you’re not under pressure.
“Doing that when you are in an unemotional state, you’re being thoughtful about the plan and the process and you’re not in this situation where you’re being forced out of a job and losing your income, I think that’s the key,” said Jay Friday, head of Wealth Management Planning for Citizens Bank and a certified financial planner. “…You’re thinking about all the scenarios. One of those is maybe I could lose my income.”
With so much uncertainty in employment and the stock market, having a plan lets you control what you can, said Dana Vosburgh, director of Family Wealth Management at Manning & Napier. The plan starts with identifying your goals – or what you think you want – for retirement and tracking spending through your working years. “It’s hard to make a plan if you don’t know what you’re spending.”
Vosburgh said many people, regardless of their income, have little idea of where their money goes. “It’s important to have a budget in place for anybody at any time, certainly from a retirement planning standpoint as you’re working toward retirement.”
Generally in retirement, people need about 80 percent of what they did when they worked to live a similar lifestyle.
“If you have a good idea of what you’re spending now and how you feel about that, that can give somebody a good ballpark figure to work with as you’re doing the planning,” said Vosburgh, a certified financial planner. “Things might change. Then you adjust the plan.”
The specifics of your plan will, of course, depend on your goals. “Goal-setting is to give people freedom and choices,” said Herendeen, a certified financial planner. In general, you should be saving money in a variety of tax-deferred and taxable accounts, so that should you find yourself out of work, you can get at your funds without having to worry about penalties.
You can plot your plan by age or by where you are in life. Here’s what the experts suggested:
Starting out in your 20s and 30s: College debt likely will be a factor for many years, but experts said that obligation shouldn’t derail long-term savings goals. They said studies have looked at paying debt in relation to building savings, and the thought is that you should try to put enough into your 401(k) to get your company’s matching funds. “It’s free money they will give you,” Friday said.
A certified financial planner can advise you on paying off your loan as aggressively as possible while socking money away. “You want to look at everything and put some money to the liability,” Herendeen said. “You don’t want to throw everything at it.”
It’s not so much what your portfolio looks like at this point, just that you are building one.
Midcareer in your 40s and early 50s: You may have residual college debt. You also may have your own family and be starting to care for aging parents. Friday called these the tweener years, and they can be financially demanding. However, they also can be peak earning years and can give you momentum. One adviser suggested that in addition to fully funding a company-matched 401(k), put money into investment vehicles that won’t ding you for withdrawals before a certain age.
Vosburgh said that business owners should be thinking of how they will fund their retirement and assess their savings plan. “It’s most likely that they put so much time and effort into the business that they haven’t saved elsewhere. … My broader point is that things can become more sophisticated and people might have some big assets they have to plan around, and you want to account for that in your retirement planning.”
Countdown to retirement in 50s and 60s: Friday said that around age 55, people seriously start thinking about retirement and what those years will look like. This is when your plan picks up nuances, and you adjust specific investments as goals get closer to reality. If you have various accounts and insurance policies, it may be time to get organized. It also helps to have a continuity plan in case something happens to you and your spouse or children need the paperwork.
If you haven’t been much of a saver until this point, you still can plan and budget for a retirement that’s within reach.
Besides figuring out the finances in your 50s and 60s, you also have to come to terms with the notion and emotion of retirement. “It’s where you start to have a new concept,” Vosburgh said. “You’re moving from a period of time where you’re saving and you’re moving into a period of time where you’re using all that money you saved. It’s a hard transition.”