As the old adage goes, “Money can’t buy happiness.” And it’s true! Many of the best things in life needn’t cost you an arm and a leg. Family, friends and nature are all free. Many hobbies cost next to nothing.
But the reality is that you will need funds when you retire even if you envision a simple lifestyle. A good retirement planning strategy can minimize your financial worry during your golden years. So, if you would be happier retiring than working, you might consider a new adage: “Money can buy a retirement.”
Chances are you have been saving for retirement through an employer-sponsored retirement plan, Individual Retirement Account (IRA) or some other investment accounts. But how far will your retirement savings go? Here are four quick tips to help you retire happily and with enough money.
1. Know what to expect from Social Security. You may have an idea of what you could expect to receive in Social Security benefits. If not, you could use the calculator on the Social Security Administration website to estimate your benefits. This calculator will show you an estimate of how much you would receive for three scenarios—if you begin taking your benefits at full retirement age, at age 70 or at age 62. You may find estimated benefits are higher if you delay taking your benefits. Keep in mind these estimates are based on averages and may reflect what you could expect to receive before income taxes are taken out. Even if you expect to receive more than the average, if you wish to travel, visit grandchildren and spend money on other hobbies, you may need to supplement the retirement income you receive from Social Security with other funds. While we don’t necessarily believe this legislative entitlement will be completely eliminated any time soon, it could very well be revised in the future. Revisions have occurred over the years. It is reasonable to expect change.
2. Understand your spending. It goes without saying that you should watch what you spend, even before you retire. It is especially important after you retire. It is good to have an accurate tally of how much you are spending and what you are spending that money on. What you spend your money on is important. Think about what matters most to you and what spending will make you happiest. Tracking your spending can help you generate a budget—a breakdown of your projected monthly income less your expenses. This can help you determine your financial needs in retirement. More particularly, if your projected monthly expenses are greater than your projected monthly income you’ll need to figure out how to fund this difference—perhaps through cash flows generated from an investment portfolio—or how to lower your expenses.
Maintaining the discipline to spend according to your plan can be a challenge. It is a good idea to have a little extra money saved up to accommodate occasions when you spend more than anticipated. You also have to consider the ongoing cost of inflation.
There is a chance your expenses may change after you retire. Since you probably won’t be working, costs related to clothing and commuting may shrink. However, some costs such as health care, travel and entertainment may rise. You should also think about how your tax situation may change after you retire. Make sure you have enough funds to cover any emergencies or unexpected events.
3. Choose liquid investments. Liquid investments are ones that can quickly and easily be sold, while illiquid investments are ones that might be hard to sell on short notice or that might have a large bid-ask spread, making it hard to discover the asset’s true price until you try to sell it. Why should you invest in liquid assets versus illiquid ones? Liquid assets ley you quickly turn an investment into cash, ensuring you have access to that cash when you need it. Stocks and Treasury bonds are two examples of liquid investments. Because of their liquidity and potential investment returns, some investment managers use these securities in retirement investment strategies. However, not all bonds are liquid, as some bond aren’t traded frequently and could be difficult to sell in a rush if needed.
Liquid investments also make it easy to change your investment strategy when your market outlook changes. For example, if you believe US stocks are likely to outperform non-US stocks moving forward, you can sell some of your non-US stocks and buy more US stocks to reflect your outlook. As your outlook changes, you can make nimble moves like this without much difficulty.
Physical real estate, on the other hand, is an illiquid asset. Transaction costs may be high, and the settlement process can be long and involved. If you are in a rush to sell, depending on the real estate market and location, you may have to reduce the property’s price to sell it. Partnerships, non-traded Real Estate Investment Trusts and annuities are often illiquid investments as well.
4. Start planning and plan for the long term. “The best time to plant a tree is 20 years ago. The second-best time is now.” The same applies to retirement planning. Regardless of your age, if you need money to retire comfortably, you should begin planning your retirement financing strategy now. Start setting aside funds in a retirement plan offered by your employer, IRA or other investment account. The single greatest power in investing is compound growth over time. Long-term investing in stocks, bonds or other securities shouldn’t be a get-rich-quick scheme. Likely, your goal is to have the necessary finances for yourself and your spouse in retirement and maybe to leave something for loved ones or charity. When you start saving for retirement, whether through an employer-sponsored plan or an IRA, think about investing for your entire life and potentially beyond. Investing for retirement is a longer-term process where you gradually grow your retirement savings.
These four basic tips on funding your retirement could help you start making a financial plan. Your unique circumstances will ultimately help you determine your financial goals. No one can tell you whether the value of your retirement account will bring you happiness, but if you have to worry about retirement income, your overall happiness may be hindered. Proper retirement planning could help you achieve peace of mind and let you focus on other things.
As a retiree, there may be a chance your savings and income don’t last long enough to meet your longer-term spending needs. We can work with you to identify your financial goals and come up with an appropriate plan that can help ensure your savings are in line with what is important for you.