Whether you are in your 40s or approaching retirement, long-term financial planning should be on your mind. If you want to enjoy a comfortable lifestyle, but you will no longer receive income from a full-time job, you will need to think about cash-flow from other sources, including Social Security, lifetime savings, a retirement portfolio, and maybe some other sources.
While each individual situation will require a specific approach, it’s a good idea to get a general idea of some retirement planning fundamentals. Two primary aspects of financial planning for retirement are wealth preservation and income certainty. Not only should a financial plan match retirement expenses and costs of living with income streams, it also needs to account for how income-producing assets will last as long as you need them to.
Say your risk tolerance tilts toward the conservative spectrum, or where appetites for stomaching financial losses are low. Then you may want to evaluate retirement strategies that provide the emotional comfort of knowing where your money will be coming from, month-to-month, to pay household bills and expenses. We call this Safe Money retirement planning – or making assurances that the money you can’t afford to lose is under the “lock and key” of contractually guaranteed protections.
Of course no retirement success springs up overnight. So, here’s a quick look at 4 simple steps to help you reach more long-term financial wellness and peace of mind.
4 Steps to a Safe and Comfortable Retirement Financial Life
1. Have a Plan. Whether you are still in the workforce or a few years into retirement, it’s important to develop a roadmap to financial security. You should not only consider your income and current resources but also your plans for the future – when do you plan to retire? What is your life expectancy? How much money do you need annually to sustain your lifestyle?
These and other questions are essential parts of your retirement planning puzzle. Yet even though many people understand the importance of having a plan, few do. In a 2016 survey from Harris Poll, 35% of Americans reported they hadn’t talked to anyone about retirement. Likewise, the Employee Benefit Research Institute found that 59% of people have not calculated at all how much they will need in retirement savings.
Even though it’s basic, these findings underscore the critical importance of having a blueprint for your future. So, start talking with a financial professional about your retirement objectives, needs, and goals. Also, be sure to arm yourself with relevant and up-to-date information so you can make well-informed financial decisions.
2. If Market Risk Makes You Uneasy, Understand the Role of Safe Money in Your Plan. As mentioned earlier, many people today have a low appetite for losses. This might apply to you, or you might have a more moderate to higher risk tolerance for potential losses. No matter what, the concept of “safe money,” or the money you absolutely must have when you need it, applies to everyone to some degree. While the question of what safe money is in real world terms may vary, we can define it broadly as money that should be as free and protected from unnecessary risk, as much as possible.
So, whether your safe money is to be used as retirement income, college education funding, an emergency stockpile, an extravagant “rainy day purchase,” or something else, it needs to be part of your plan. Think about where your safe money is currently parked in. Is it sitting in a bank, is it in a brokerage account, or is it part of a retirement savings plan, like an IRA? What risks might it be subject to? Some risks to consider may be:
- Volatility of the equity markets
- Interest rate risk
If you need help identifying ways to protect your safe money, working with a financial professional who understands retirement issues can help.
3. Ensure Income Security. As mentioned before, it’s important to have safe money for retirement. For this, smart financial planning is key. While equities and other higher-risk investments offer strong growth potential, a guard against the effects of inflation, they can lead to losses of principal. This can leave retirement investors exposed to “sequence-of-returns risk,” or the danger of financial losses to the extent that future withdrawals can greatly undercut your retirement security.
Because of this risk, it makes sense for more risk-bearing options to be just a part of your overall plan for retirement. You will also want to investigate ways to preserve the money you have already saved, earned, and will be using for income. One way to look at it is by using the Rule of 100. This means assuming that you will live to be 100 years old and configuring your retirement strategy around that expectation.
So, if you are 65, then you subtract 65 from 100 – meaning that you should have 65% of your money placed in safe instruments and have the other 35% in more risk-bearing options. This can be a helpful rule of thumb for weighing the risk profile your portfolio currently has. But no matter what, it’s prudent to work with a knowledgeable financial professional who can help you make appropriate portfolio allocation decisions based on your financial picture.
4. If You’re Behind on Your Savings Goals, Consider Ways to Delay Retirement. As life expectancy rises, it can become harder to have the financial resources to retire comfortably. As such, it may be a good idea to delay retirement if you can and need to. A delayed retirement may include a variety of options:
- Continuing to work full-time
- If you own a company, maintaining active participation in your business
- Pursuing part-time work or consulting opportunities
- Along with these work options, continue stashing away savings
- Just using a variety of tax-advantaged savings vehicles to catch up on target savings amounts
- Any combination of these options
With their tax-advantaged status, IRAs and other personal retirement savings plans are an excellent source for late-term savings build-up. The catch? Contributions to traditional and Roth IRAs must be funded with “earned income,” as the IRS requires. Earned income can be more than wages, salary payments, and tips, but those are the types of income many Americans bring home. Things such as dividends, interest, Social Security benefits, unemployment benefits, and child support don’t qualify as money sources that can be used for tax-advantaged IRA contributions, according to the IRS.
Whether it makes sense to continue working or not, another tax-advantaged vehicle you can use is a fixed-type annuity — particularly a multi-year guarantee annuity. This type of annuity is pretty straightforward in regards to how it earns interest. Over a certain duration, a multi-year guarantee provides you with a guaranteed rate of growth. This can be a “safe” option for retirement savings alongside retirement accounts and other places where you may be building up funds. To diversify risk amongst insurers, you may consider purchasing more than one fixed contract from different insurance carriers.
Peace of mind when it comes to retirement becomes more and more important as you get older. However, if you start planning earlier, then it will be easier for you to have more control over your money and be financially confident. And this need not be something you have to do on your own, either.
If you are ready for guidance with your retirement future, financial professionals at SafeMoney.com standy ready. They can help you achieve your goals for your money, put you in the driver’s seat for your retirement, and prepare you to enjoy more financial confidence. To get started, use our “Find a Financial Professional” section to connect with someone directly. Should you need a personal referral, call us at 877.476.9723.