If you already have a retirement plan in place, you are well ahead of the typical person with an investment account. But you need to monitor and update your retirement plan as you progress through your career to make sure you are still on track. Here are five ideas to strengthen your retirement plan.
1. Use your own portfolio performance to project future growth. Include as much data as you have. Past performance is no indication of future performance, but it's much better than simply using the past year's performance to predict what will happen for the next 20 years. Using your own portfolio performance as guidance is more accurate than using historical averages, because personalized results account for our actions, such as what we tend to do when markets are depressed and the economic situation seems dire.
2. Factor in your spouse's risk tolerance. Most people don't take the time to talk to their spouse about money. As a consequence, the risk a family takes on with their investments is usually based on the tolerance of the person who makes the decisions. Take some time to discuss retirement investments with the whole family and find a plan that works for everybody. Achieving financial freedom is a goal that everyone must work toward and will ultimately be enjoyed by everyone involved.
3. Account for your ability to make decisions as you grow older. Many people shun financial professionals because they don’t want to pay a financial adviser around 1 percent of their assets every year in order to get standardized advice. However, an adviser is more objective about what needs to be done, and they can help you see the logical side of your financial situation as you get older and making decisions becomes more difficult. It’s a good idea to pick a person you trust to manage your investments while you still have the time and energy to stay on top of your finances in case you need help in the future.
4. Know how your plan will change if there are sudden emergencies. Make some contingency plans, because a few financial emergencies are likely to occur before you finally leave the workforce. You shouldn't assume that your current level of saving and investment returns will continue indefinitely. So be a bit conservative and save more than you think you will need. There really is no such thing as saving too much, especially when it's so easy to inflate your lifestyle.
5. Don't underestimate how much can change in 10 years. It's hard to imagine what your life will be like a decade from now, but don't short change yourself. Many people look at their current situation and try to extrapolate to the day they retire, even though life is seldom going to be the same for so many years. If you are willing to work hard, you can save a lot of money and climb up the corporate ladder, but you might also want to start or grow your family and work fewer hours so that you can spend more time with them. This means different levels of assets, income, and spending, which you should take into account in your retirement plan.
Developing a retirement plan is a great start, but you will need to update the plan as you move through your career. Take steps to improve the accuracy of the plan each time you make a major life change and as you get closer to retirement.
David Ning runs MoneyNing, a personal finance site aimed at helping others change their habits for a better financial future. He suggests that everyone to sign up for an online savings account to get more out of our hard earned money.