6 Steps to a Better Retirement

Standard financial-planning advice often begins with telling consumers to set aside three to six months of their spending needs in liquid assets. This is important, we're told, so that we have money stashed away for an emergency. Otherwise, we might have to sell investments at an inopportune time or dip into retirement funds. The assumption is that consumers have discretionary resources to begin with and thus have the luxury of a studied response to an emergency.

In most households, an emergency really means an emergency. Many consumers don't have extra money lying around. Even in normal times, funding the next three to six months' spending needs is a stressful balancing act. How effective it is to tell these households to set aside yet more funds—funds they don't have—for longer-term retirement and old-age health needs?

It's also true that millions of Americans are living successful retirements. They had stresses too, and figured out ways to overcome them. During these difficult economic times, it's important to remember some basic steps that can help people of all ages either regain or enhance their financial independence.

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1. Aesop had it right. The land of opportunity has been marketed as the land of the quick fix, the big hit, and the lottery win. Some days, it seems like the entire country is playing in the World Series of Poker, just itching to go "all in." Instead, play a more modest game, one in which each day presents decisions that can add a bit more to or shave a bit off of your financial future. Winning this daily game is an effective way to produce cumulative results that will support a successful retirement.

2. Plan and execute. Things were so good in this country for so long that financial planning may have seemed like a waste of time. Whatever the cause, we are lousy money planners. Until this recession hit, we were spending more each month than we earned, and we made up the difference with credit cards and by borrowing against the rising equity in our homes. We want to blame greedy Wall Street firms, and some of their compensation packages truly are obscene. But let's be honest. We were more-than-willing coconspirators. That party's over, and now we face a sobering future of lower growth. To thrive in the future, you must plan and stick to your plan.

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3. Begin at the beginning: Part I. Make a household budget. Simple, right? Actually, no. Developing a useful household budget is hard work. I've found it helpful to use my bank's online bill-paying tools to make a detailed record of my spending, accompanied by details of my credit card charges. I seldom pay a bill in cash. As a result, I have a line-item report for just about every transaction I make, spread across about a dozen spending categories that include tax-deductible items as well as practical categories like groceries, auto expenses, healthcare costs, and utility bills. There are software programs that can help you, but a plain spreadsheet program works fine for me. I'd also recommend using ESPlanner software (there's a free version) to help you develop a spending profile that's right for you and your family.

4. Begin at the beginning: Part II. Once you know what you spend, develop a plan to review each major category to see where you can cut. One month it might be groceries, another month utilities, and another car expenses. Prices and business terms change when you're not looking. I recently got new bids on my auto and home insurance and found big savings without any sacrifice in coverage. It is truly remarkable how our spending patterns become fixed and how dollars that were once discretionary seem to have become essential. I'm betting you can cut spending without hurting the quality of your life. But maybe some quality sacrifice is worth it in the short run to create a better retirement outlook.

5. Lose the mortgage. If you have a home mortgage, consider accelerated payments. For most of us, a successful retirement may not be feasible if we have to continue making mortgage payments. Making extra payments on your mortgage can produce stunning results toward a debt-free retirement. Bankrate, among other websites, has a convenient mortgage payment tool that allows you to vary the assumptions and see the impact. If you had 25 years left on a 30-year mortgage at 6 percent, for example, and your mortgage stood at $250,000, you would be paying about $1,500 in monthly mortgage payments (this excludes taxes and insurance.) If you could boost that monthly payment by $500, to $2,000, you would pay off your mortgage nearly 10½ years early and save more than $100,000 in interest payments.

6. Diet and exercise are great investments. Healthcare expenses are the single biggest unknown expense in retirement. Out-of-pocket expenses not covered by insurance run more than $250,000 over a typical person's retirement years. Taking better care of your body is the cheapest way to keep those expenses down, feel better, and, in most cases, extend your life span as well. I hope we get a health reform package that supports wellness programs—but don't wait for one to begin developing better habits.

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