Saving for your future retirement is no joke, but many people treat it is a low priority and are not prepared…big mistake

Planning on retiring are you?  Well, I retired a year ago and already I am feeling the impact of rising expenses and a fixed income (medical costs, insurance premiums and property taxes most notably).  But I am lucky, I have a good pension, I have social security and I have a 401(k) plan.  If you are not so lucky and your retirement is mostly dependent on your ability to save, invest and then manage your money for the rest of your retired life, you have some serious planning to do.  In fact, some research shows that even with a pension and social security many people are not saving sufficiently now to meet their needs in retirement.  The greatest risk you will face in retirement is longevity.  So you have two choices, save more now or plan on reducing your longevity in the future so that you do not outlive your money.   Giving up a few meals out, a vacation or two and the like seems like a more appealing alternative to me.

To get a better understanding of the future you may face, take a look at this recent article in the Wall Street Journal, Retiring Boomers Find 401(k) Plans Fall Short

In order to get where you want to go even if it is thirty years from now you need a plan, a map and a strategy.

Here are a few simple tips to consider:

1. Have a realistic idea of what your expenses will be in retirement- hint, they won’t drop by 20 or 35%  For example, let’s say you are an average person and you pay the basic Medicare premium plus Medigap coverage and Part D, well, for a couple in today’s dollars you just lost roughly $800 per month of your retirement income and that does not include out-of-pocket medical costs.
2. Save early even if you have to lower or stop your savings in future years, say while paying for college.
3. Don’t make withdrawals or loans from your 401(k) plan, put the money in and forget it until you are ready to head to sunny Florida some year in the future
4. Live life as if your gross income is less than it actually is.  For example, if your family income is $80,000 a year, assume it is $70,400 and save the 12%  difference – or more ).  The idea is not to make your life miserable until you retire, the idea is to have a steady lifestyle from here on out, even if you live until 100.  [see note below]
5. Pay attention to where you invest your money. This is investing not just saving.  That means you need to be diverse, you need to use an investment mix that provides growth and some security and most important you need to adjust your investment mix the closer you get to retirement (and using your money).  Many of the folks in their sixties who lost most of their retirement savings in the recent market crash did so for two reasons.  First, they were too heavily invested in equities for their age (they did not have time to recover their loss before retirement) and two, they moved their assets out of equities at the bottom of the market thus guaranteeing their losses and missing the recent market recovery.  In the years just before I retired I shifted much of my 401(k) into fixed income investments.  As a result I was largely unaffected by the market crash.  In the two years since January, 2009 my account has grown by 19%.  Could it have grown much more in that period if I were invested in equities, in retrospect it may well have, but that is not the point.  I am sixty-seven, I sleep better and didn’t see my life savings depleted.  However, you have to do what makes you feel comfortable and is best for your financial situation.  The key is that you must know what that is.   However, there is something to be said for the tortoise in that famous race. 

Note: Think of this process this way.  Say you are a teacher and earn $50,000.  Naturally you pay your taxes, etc. and spend the balance.  But your earnings are not really $50,000 they are likely as much as forty or fifty percent more.  Why, because part of your compensation is deferred into your retirement in the form of a pension and health benefits.  Some of that compensation is also your benefits while you are working.  In this example, you don’t earn $50,000 but more like $75,000 and a lot of it tax-free as well.   If you are not so fortunate as to have a good package of employee benefits, it is up to you to fund your own.  Hence, unless you can raise your income by 40% or so to pay for those benefits, you must adjust your standard of living to pay for them from your current income. 

Related Articles

• Boomers Find 401 (k) Plans Come Up Short (online.wsj.com)
• Raiding Your 401(k) Can Be Taxing (turbotax.intuit.com)