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Retirement: It’s Never Too Early To Start Thinking About Saving Strategies

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Retirement: It’s Never Too Early To Start Thinking About Saving Strategies

Whether you’re 25 or 50, dedicating some time now to planning for retirement finances will do you a world of good.

In fact, it could be the most prudent thing you could ever do.

Set goals for how much you will need: don’t put it off!

The first question you need to ask yourself is, what do I already have?

First and foremost, you should assess the size of any savings you’ve collected up until now, hopefully through 401(k) plans and IRA’s, or other types of saving accounts.

A recent Time article claimed that one in three Americans had nothing saved for their retirement.

Though low earnings undoubtedly make up a big proportion, the number is too high for it not to include those that could have comfortably saved sizeable amounts for retirement.

A recent study by the Fidelity Research Institute showed that most over 55’s have enough in personal savings, projected social security payments, and pension income to cover that same percentage of their current salary.

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This means effectively needing to slash their spending by a half once they reach retirement.

Which leads us on to our next point.

Don’t assume you won’t need as much as you do now

This is where your personal lifestyle and situation is the most relevant to considerations about retirement saving.

Many assume that retirement will be a spend-free heaven.

The graph below shows otherwise:

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As you can see, the median change in income is actually around 0% and even goes up for those in the lowest income group.

While overall, yes, spending decreases, it is dangerous to assume this, and many do.

In fact, Fidelity tell us they found that 39% of retirees said they made this very mistake and underestimated their retirement spending needs.

They may have missed the following significant, yet often unpredictable spending needs:

  • Healthcare costs increasing as health deteriorates
  • Providing emergency financial support for children and grandchildren: with a wider extended family, there is more likelihood of financial emergencies falling upon the grandparents’ shoulders
  • Many find that spending more time at home necessitates spending more money on refurbishment and home improvement endeavor

There is also just the reluctance to downsize, even if none of the above throw a spanner in the works.

People may become used to a certain level of spending, and it’s not that rare to find oneself spending more in retirement than less.

Take into account unexpected medical costs, even if you’ll still have health insurance in retirement.

Unfortunately, many companies are reducing their lifetime health coverage for retired former employees, as much as 10% according to a study by Kaiser Permanente in 2006.

Fidelity tell us that a couple in their mid-60s will spend, out-of-pocket, around $200k on prescriptions over their life until 84.

This isn’t even taking into account possible costs of treating deteriorating hearing, sight and motor skills, afflictions that affect many elderly people.

Not to mention nursing homes, which are renowned for milking their patients dry.

The average cost is a staggering $75k a year and rising annually.

Long-term health insurance is an option, especially those including assisted living and nursing, but these can be rip-roaringly expensive.

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Hire a financial advisor

Knowing that retirement spending needs can be unpredictable is one thing.

Knowing what to do about it is another.

For this reason, it’s a good idea to go to the professionals.

Hiring a financial advisor is something every salaried individual should do, and it’s never too early to do so.

In fact, a poll by Employee Benefits Research shows that most respondents found hiring a financial advisor to be the greatest thing they did when it came to saving successfully.

 

But if possible, take time to learn about retirement investment opportunities yourself

The myriad of options for investing your money can seem daunting.

But so did learning to ride a bike or learning your multiplication-times-tables once, yet you managed those alright?

Many people spend more time looking for vintage car bumper stickers on Amazon or watching re-runs of their favorite TV shows than planning for retirement.

While there’s nothing wrong with either of those things, doing them at the expense of shrewd retirement planning is probably not the best move.

And complacency can come to bite you in the butt.

The better you plan, the more time (and money) you’ll have to do both those things later!

401(k)? Milk that cash cow

The table below shows the earning potential of a 401(k), at both the low and high ends.

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Once you’ve got the advice from the professional, you’ll have come out of the meeting with a mantra of ‘save save save’ ringing in your ears.

401(k)’s and IRA’s are a great way to do this.

Dee Lee is the author of Women & Money, and a certified financial planner.

He gives the following example to demonstrate the benefits of a 401(k):

A couple, both contributing $10,000 a year to a 401(k) plan would each have around $90,000 after ten years.

This is assuming a growth rate of seven percent a year, a common and presumable one for 401(k)-type plans.

Be prepared to take on some risk

However, to get that beautiful 7% growth, they’ve decided it necessary to take on risk.

Rather than stick with bonds which are safe bets and trot along at a tidy 5%, they decided to introduce some market risk and allow a portion of the savings to stocks.

Looking back, historically, stocks tend to earn around 10% a year, but this is with all the market fluctuations and volatility that comes with it.

Should you be willing to stick with it you could come out strongly.

For some, they won’t reach their goals if they aren’t prepared to take any risk.

On the other hand, some people cannot tolerate the risk involved with market trading and investments in stock.

The important thing is to sit down with your financial advisor and formulate a strategy that works for you.

Ellen Rinaldi, a head honcho at mutual fund management group Vanguard, says that at 50 you should not wimp out and go to cash instruments (bonds, securities, loans, etc.), but rather look to stocks for growth.

Consider the timing of your retirement

Some people decide to delay retirement, but again this will be entirely down to your personal circumstances.

What if savings and investments alone won’t adequately fund your retirement?

You will need to be prepared to make those important decisions.

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It is increasingly common nowadays for people to slow down into retirement rather than make a full stop.

For example, many will work part-time rather than stop completely.

Or, switch fields into one less stressful but still remunerative enough.

This isn’t just for financial purposes either.

Many retirees find themselves unable to cope with the amount of free time that retirement opens up.

This is evidenced by a study carried out by Putnam Investments.

They found that a whopping seven million retirees return to work after 18 months of post-work life.

Only around a third were for financial reasons, though 40% said that they would have put more into company retirement plans if they could do things differently.

Evidently, those who returned with their new perspective on the financial implications of retirement made shrewder decisions.

They saved 11% of their income.

And their average income was around one-third higher than the average income for those retirees who didn’t continue working.

Financial matters aside, returning to work can also help personal growth (yep, that doesn’t ever stop!).

 

Retiring early isn’t just about earning more

The obvious benefits to retiring early include not only earnings potential, but the social security earnings you will receive.

The later you start to tap into them, the better.

When you were born affects how much later.

For example, born in 1938 or earlier?

You qualify for all benefits by 65.

Born after 1960, you will wait ‘til 67, and 66 for those in between the two dates.

Many people are tempted to jump the gun and retire earlier, but this is risky as you’ll see reduced benefits over your entire lifetime.

This penalty for retiring early is even harsher when it comes to the retirement saving vehicles we mentioned earlier, the 401(k) and the IRA.

In their contracts is written an early withdrawal penalty, which is currently at around 10%.

10% of your work life savings is an enormous amount, and it’s shrewd advice to tell you not to do this.

Luckily, the cash-out age for these is earlier than social security, currently standing at 59 and a half.

Also, don’t assume working will become harder as you will get older. Many find that the experience that comes with years in the industry means they don’t need to work as hard to get the same amount of work done.

Wisdom trumps energy and makes up for lack of the latter.

Tim Driver is CEO of Retirementjobs.com.

He explains that older workers are also filling up the gap of younger employees starting which is evident in many industries, mainly due to low birth rates in developed countries over the last 30-40 years.

He explains that increasingly, work is being seen as a fundamental part of retirement, which might seem paradoxical.

However, with an aging population, our approach to retirement is inevitably going to change, and the evidence cited so far goes some way to showing the seeds being sown for this work revolution.

The infamous ‘D’ you will have to grapple with, and it ain’t Dad

Debt is obviously a big part of the equation, particularly mortgages.

Gone are the days of everyone paying them off early in life.

Harvard Research shows that 6 out of 10 homeowners aged in the 55-64 age bracket (those approaching retirement) still owe on a mortgage.

Experts cross swords on whether you should pay your mortgage off as quickly as possible.

Rather, you could earn more putting that money into the stock market.

However, most who quit, find it too difficult to continue mortgage payments without work.

And Putnam Investments research cited earlier found that retirees returning to work had, on average, only about half of the equity in their homes.

You could look at your home as an investment vehicle, but it is unwise to go into retirement with a large mortgage.

Don’t become one of those horror stories of a poor old person being kicked out of their house for failing to keep up with mortgage payments.

 

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