What’s your retirement dream? Travel the world? Move to Arizona? Become a migratory snowbird? Improve your golf game? Open a part-time consulting business? Spoil your grandchildren?
Whether retirement is decades away or just around the corner, it’s difficult for many retirement investors to determine whether retirement dreams are actually attainable goals. But this is no time to stick your head in the sand because retirement is coming.
Take control and take action. Figure out what dreams could be reachable goals, and create a strategy to make them reality.
Here are seven considerations to help you get organized:
Goals. With your dreams in mind, set your goals. Be as realistic as you can be during this step, but you’ll have the chance to adjust your goals at step five. As you do so, answer these questions: At what age would you like to retire? Where would you like to live during retirement? What hobbies and travel plans would you like to have? Do you want to be able to help your children and/or family during your retirement years?
Needs. Calculate the amount of money you’ll need. Many people approach this in terms of income replacement: What percentage of your current income will you need each month during retirement? Create a breakdown of your current budgetary spending and decide which of the expenses will continue during retirement. Also account for new expenses. Things to consider: Will you have a paid-off mortgage? Will you have a car? Will insurance premiums and fuel usage change during retirement? Could you sell your car and use mass transit? Meanwhile, nobody wants to think about dying, but it’s important to plan well so you don’t outlive your money. Unless you have specific knowledge of a medical condition that will certainly cut your life short, plan your retirement finances as if you’ll live a very, very long time.
Investments. There are lots of online calculators designed to help you create an appropriate asset class allocation. A good calculator will consider your timeline to retirement, tolerance for risk, and personal biases. Armed with a percentage breakdown of the asset classes appropriate for you, you’ll be able to research the investing options in your retirement plan to determine how to allocate your investments. If this process seems overwhelming, consider seeking professional 401(k) investment advice through a service that focuses on personalized investing.
Savings. Calculate how much money you need to set aside each month in order to reach your retirement goals. Consider the following: How aggressively do you plan to invest? A more aggressive allocation has the potential to yield higher returns; however, keep in mind there is potential for more downside as well. Will you have income from part-time work or any source beyond your IRA and employer-sponsored retirement plans? Are you due to inherit any money? If this step has you stumped, there are online calculators that may help. Again, this is an area where good investment advisory services shine.
Adjustments. If the retirement of your dreams is financially impossible given your current lifestyle, something has to give. Either adjust your rate of saving to fit your retirement goals or adjust your expectations to fit your rate of saving. If you can make budgetary cuts today that allow you to contribute more money to a retirement account, you’ll reap the rewards during retirement.
Regular reviews. Put a plan in place to review your progress and increase your retirement savings rate each year. Literally create a recurring calendar reminder and set aside one afternoon each year to devote to retirement preparations.
Big picture. Organize all your finances. Make your current budget works for you. Consider using Mint.com, iBank, or a similar service to track your spending habits. Also consider purchasing a long-term care insurance policy. Health insurance generally doesn’t cover extended stays in care facilities or ongoing in-home assistance, even if they’re medically necessary. Long-term care insurance could save you megabucks during retirement. Similarly, investigate disability income insurance, which would allow you to avoid using retirement savings if an illness or injury keeps you away from work. Finally, leave a legacy with life insurance rather than your retirement savings. That will allow you use your retirement savings to fulfill your goals without feeling guilty about your heirs.
People who know what they’re doing won’t tell you retirement planning is easy. It takes time, research, and discipline. Rather than dwelling on the outlay, I suggest you focus on the reward. Approach retirement planning with the same joy you have for vacation planning, because retirement could be the longest, most fun vacation of your life.
Scott Holsopple is the president and CEO of Smart401k, offering easy-to-use, cost-effective 401(k) advice and solutions for the everyday investor. His advice has been featured on various news outlets, including FOX Business, USA Today and The Wall Street Journal. Keep tabs on Scott on Twitter and Facebook.