Despite their best efforts, Millennials and Zoomers are facing an uphill battle when it comes to saving for retirement. Hyperbolic as it sounds, some have even proclaimed that retirement might only be a pipe dream for these generations. And, that might be some validity to that claim.
A report from the Brookings Institute found that younger Americans are bogged down by student loans and credit card debt. They’ve also been constrained by two recessions in their lifetimes. As a consequence, this has lead to wage stagnation and lower economic growth.
5 Keys to Successful Retirement
There’s also uncertainty regarding Social Security and Medicare. While it probably won’t completely be depleted as many fear, benefits will be reduced. And, with lifespans increasing, there’s a greater need to set even more money aside for a post-work life.
While the retirement struggle is real, it’s not exactly a new phenomenon.
Back in 1992, an article in the Atlanta Journal-Constitution cautioned that “[w]ith savings rates down, the future of Social Security in question and traditional plans going the way of the eight-track tape, experts say there’s a retirement crisis looming in America.”
Fast forward three decades later and that warning about retirement has come to fruition.
An Employment Benefit Research Institute (EBRI) found “nearly half of employees are concerned with their household’s financial wellbeing, citing saving for retirement and having savings in case of an emergency as top sources of financial stress.”
Moreover, an analysis from the Boston College Center for Retirement Research’s National Retirement Risk Index (NRRI) states that 50 percent of households are ‘at risk of not having enough to maintain their living standards in retirement.” Want to know the most horrifying part? These findings took place before the pandemic.
Does that mean retirement isn’t possible? Of course not. Anything is possible as long as you possess the five keys to a successful retirement.
1. Build your dream (retirement) house.
Without question, the first step is to have a solid retirement plan. “Having a comprehensive plan or blueprint will make the process easier by outlining the major areas you need to address,” writes Jammie Avila for Kiplinger.
In fact, you can think of your retirement plan as building your dream house.
“The fundamental features of any home are the foundation, walls, and roof,” adds Avila. “Of course, there are the details of electrical, plumbing, finish work, etc., but unless the core components are constructed properly, in the correct order and working together as designed, the other components can’t be expected to perform as intended.”
As you need a blueprint to build a house, it’s also vital when constructing your retirement plan. Here are the retirement blueprints that Avila and his team at Cornerstone Wealth Management design for their clients;
- The Foundation: Principal-protected, “safe” assets.
- Walls: Designed for growth and income, composed of assets not generally tied directly to the stock market.
- Roof: Typically growth-oriented equity investments with exposure to the markets.
“Along with those core components, there are some other key elements to consider in the blueprint, which we refer to as the five ‘pillars’ of retirement planning,” he adds. These include;
You need to know how much you’ll need to retire, as well as how you’ll generate an income. You aren’t going to get a precise calculation. But, factoring in your anticipated expenses, life expectancy, the amount you can withdraw annually, and savings return can give you a ballpark figure.
Don’t stop investing once you reach retirement. Keep a diversified portfolio to protect against risks and market fluctuations. Additionally, this will allow for portfolio growth.
Taxes do not vanish once you retire. In fact, this is an overlooked expense that can get complicated as withdrawals from Social Security, pension income, and retirement account withdrawals are taxed differently.
Devise a plan to minimize these taxes, such as having a tax-deferred or tax-preferential vehicle like a Roth IRA. Other suggestions would be to;
- Lower monthly expenses so that you’re making fewer withdrawals.
- Make tax-exempt investments like mutual bonds.
- Earn income from sources that have tax advantages, like capital gains and rental real estate investments.
- Move to a state that doesn’t tax retirement plan income or has no state income taxes.
Health care planning.
“Due to rising health care costs, increased deductibles, and restrictive insurance plans, a chronic illness or sudden medical emergency can lead to financial disaster,” adds Avila. “Like taxes, health care costs don’t just vanish when you retire, in fact, they tend to become a larger portion of your expenses the older you get.”
Instead of banking on Medicare, invest in a Health Savings Account and budget for future medical expenses and long-term care.
“Finally, the fifth pillar of your retirement blueprint is legacy planning,” states Avila. “You’ve worked hard all your life to build your wealth, and you deserve to have it passed on to your beneficiaries in the most expeditious and tax-efficient manner.”
“Estate tax laws are complicated and can change year to year, therefore it’s paramount that you have an experienced professional to help you navigate the process.”
2. Keep budgeting and frugal on.
“Budgets set the framework for retirement plan success,” writes Chirantan Basu for Zacks. “They provide a way to manage your income and expenses so that you can pay your bills and save something for your retirement portfolio and emergencies.”
At the beginning of each year, estimate your monthly income and expenses,” advises Basu. “The difference is your net savings per month, after adding in a reasonable safety margin for unexpected expenses, such as medical expenses or emergency travel.”
“Be prepared to modify these budgets to adapt to major life events, such as when you start a family or when your kids attend college.”
Another advantage of budgeting? It can help your cut back on unnecessary and discretionary spending. In turn, this ensures that you’ll spend less than you earn.
Another trick that you can try if you haven’t retired yet is to plan on spending 100% of your working income in retirement. As opposed to the often suggested 80%, this will give you a buffer.
3. Make an informed decision about Social Security.
While you can begin to claim Social Security benefits at the age of 62, you’re better off waiting.
“Social Security benefits are calculated based on your 35 best earning years,” explains J.P. Morgan. Once you reach Full Retirement Age (FRA), you’re eligible for 100% of your benefit. But, this can vary depending on the year you were born.
For those born in 1954 and earlier, the FRA is at age 66. “Claiming at 62 will permanently reduce your benefit by as much as 25%,” adds the J.P. Morgan associates. “Waiting to claim after FRA gives you an 8% increase each year in your benefit amount for a maximum of 124% or more.”
Because of the Social Security Amendments Act of 1983, if you turned 62 in 2020 you’ll have an FRA of 66 and 8 months. “This Act moves FRA 2 months each year for 6 years until it reaches and stays at age 67 in 2022. An FRA of 67 results in even less if you claim early and not quite as much at age 70.”
How long should you delay these benefits? That ultimately depends on how long you plan to live. “You would receive more in total at age 76 by claiming at FRA (66 and 8 months) rather than 62, and at age 80 when choosing between FRA and 70,” they state.
“Because of the relatively high probability of living to 76 and 80, particularly if you are married, delaying Social Security often pays off in the long run—especially if you are the primary wage earner of a couple and your portfolio gives you that flexibility.”
4. Take advantage of your employer’s match.
Do you know what boggles my mind? Almost 20% of Americans aren’t contributing enough to their employee-sponsored 401(k) plans to earn the company match. That’s the definition of missing out on “free” money.”
“That’s your company literally saying: ‘Hey, here’s some free money, do you want to take it?’” financial expert Ramit Sethi tells CNBC Make It. “If you don’t take that, you’re making a huge mistake.”
“While it’s fair to think about your employer match as ‘free money,’ it’s better to view it as part of your total compensation package,” explains money reporter Anna Hecht. “If you contribute enough to earn the full match, you’ll get all of the money your employer owes you. That can be a significant amount: The average employer 401(k) match reached 4.7% this year, according to retirement plan provider Fidelity.”
“A buy-one-get-one-free deal is how I think of it,” adds Monica Sipes, a certified financial planner and senior wealth advisor at Exencial Wealth Advisors “The match is something that’s considered in your overall compensation, so by not taking advantage of it you’re not getting a full freight of what your employer was expecting to pay you.”
“If you earn $55,000 a year plus a 4% 401(k) match and contribute at least $2,200 to your account, your employer will also contribute $2,200,” writes Hect. “If you only put in $1,000, your employer will as well, which means you’re missing out on another $1,200 that could be growing in the market.”
5. It’s not all about the money.
“People say, ‘I’m afraid of running out of money in retirement,’ but most don’t run out of money unless it’s a family crisis or health issue,” says Ray Ferrara, CEO of ProVise Management Group, a financial planning firm in Clearwater, Florida. “What people are really worried about is having to change their lifestyle.”
If you’ve addressed the above, then you’re in a good spot financially. And, that should help reduce stress. Besides, happiness isn’t just setting sail on a luxurious cruise.
“Find a way to savor small things,” recommends Christine Benz, director of personal finance at Morningstar. “Throughout our lives, it’s the little things that get us up in the morning.” That could be walking your dog, video chatting with friends and family, or spending quality time with your partner.
Furthermore, prioritizing your health, maintaining close relationships, and finding purpose all guarantee that you’ll have a happy and successful retirement.