Five Simple Steps to a Sound Retirement

There is often a moment where folks who have been working hard for a number of years- stop. They realize as they get closer to retirement that their plan needs to change -there’s a transition that needs to take place. Most of the time, what’s missing is a strategic and income-focused plan.  They may have some investments, and IRA, some real estate, however most people have never taken the time to sit down with a retirement income specialist who can help them drill down on what they’ll need to do to get to and through retirement.

The truth of the matter is that nine out of ten people do not have a financial plan. Most people spend more time planning their next vacation than they do the rest of their life. That’s a problem because the sooner you have a plan – the better off you’ll be. There’s no doubt about it, planning for retirement, for most people, can be overwhelming.

Do you wonder how and where to get started in retirement? Do you wonder what kind of lifestyle you’ll be able to enjoy. We’ve boiled it down to five simple steps. Use these steps as a launching point for getting on the path to a secure retirement.

Step 1: Identify Your Expected Expenses During Retirement

Expenses can be relentless.

Even though in retirement you won’t be earning a paycheck anymore, you will still have to pay the mortgage or rent, utilities, cell phone bill, healthcare, groceries, and the list goes on and on.

We like to separate your expenses into two different categories. Your basic expenses and your lifestyle expenses. These bills like your utilities, gas, groceries…. these are all basic expenses that you’ll need to have money for every single month. Your expenses such as going out to eat, taking trips, money for your hobbies, these are all lifestyle expenses.

When we meet with someone we talk about what they want to do in retirement. We want to get their dream on paper. This is what we call “drawing the retirement picture”. Everyone’s retirement picture is different. From what they tell us, we design a customized retirement income plan.

Your dreams will cost money! Work with someone who can walk you through and ask you the right questions!

When you’re retired, every day is Saturday!

When you look at your expenses through the week, Saturday and Sunday are the two most expensive days! You’re home; you have time to run around and do things. You have time to go see movies, go out to dinner, and take day trips. If you don’t work with an advisor to account for future expenses associated with a different lifestyle, you could be setting yourself up for failure.

Fidelity: Close To Retirement? Consider These 8 Steps Click Here

Step 2: Estimate What Income You’ll Need in Retirement

This step goes hand in hand with understanding the expenses you will have in retirement. You have to estimate how much income you’ll need to have the retirement you want. The rule of thumb you hear most often is that you will need somewhere between 70-75% of your pre-retirement income to live comfortably.

More often than not we have people who come in to us all the time who say “I don’t think we’ll be able to live on any less than what we’re making now”. They have dreams to travel, cruise and do things that cost money.

On the other hand, we have clients who are simple folks. They don’t like to travel… in fact they hate it! They want to put on a pair of jeans, a t-shirt and a pair of tennis shoes and live a very quiet and simple life. These two dream retirements require completely different levels of retirement income.

Investopedia: 5 Steps To A Retirement Plan Click Here

Step 3: Build a Financial House

Once you have worked to identify expenses and your desired lifestyle for retirement, then you build a financial house to accomplish those goals.

Part of that financial house should be safe and guaranteed. When we build financial houses, the safe and guaranteed money is used to cover our clients’ basic expenses. We call this the foundation of the house.

You don’t want to have a plan where your ability to pay your water bill every month is left up to chance! Most people want to know they’re going to be able to pay their bills every month. The walls of the house are designed for income. This may be income now or income later if you haven’t reached retirement yet.

Finally the roof of the house is designed for risk. This is where you often, in our plans, traditional investments such as stocks, bonds, mutual funds and managed money.

Most people that come in to see us have a house that has a giant roof and a tiny foundation, even if they’re getting close to retirement. The worst part is, they aren’t even aware that their house is built in this way! Do you have a house that is all roof? Does your financial advisor even build foundations in their plans? These are important questions to ask.

CBS News: 12 Steps to Get Your Retirement Plan In Order Click Here

Step 4: Minimize Taxes

We see tax issues all the time with individuals who have all their money in an IRA, a taxed forever account. Issues arise when they have a health care situation or something major comes up and they have to pay. The only place they have to go is their IRA. They may normally be in a 15% bracket but when this unexpected life event takes place they take that money out, it’s taxed as ordinary income and the result is getting kicked up to a 25% bracket.

Say for instance they are making $40,000 a year from Social Security and then all of a sudden they have to take out another $40,000 a year to pay for their healthcare. The IRS sees that as though they made $80,000 in taxable income that year. When this happens the money taken from their traditional IRA is not only taxed, but taxed at a higher rate!

To make matters worse, when you’re in that situation, the next April 15th rolls around and you’ll need to pay those taxes. Where are you going to get that money from? Your IRA! This means that you’ll  have to take more money out of your IRA, which will be taxed as ordinary income and you’ll already be digging yourself into a pit for the following year’s tax season.

It’s just a snowball that is going in the wrong direction. Instead of getting bigger as it goes down the hill, your IRA is getting smaller. Pretty soon you’ll find that your IRA is going to be gone.

So it’s important that you work with someone who doesn’t just do transactional investing, but who also understands, income planning, legacy and taxes.

MarketWatch: 7 Steps To A Sound Retirement Click Here

Step 5: Update Your Plan at Least Once a Year

You’ll find a lot of financial planners say a plan should be looked at every 5 to 10 years, but it should be more often than that. It really just depends on your asset allocation and how much risk you’re taking.

Many people have to meet with their advisor once a quarter, depending on what kind of assets they have. At our firm, we have a mandatory annual review. We want to sit down, once we put a plan together, and make sure we’re on track every year.

Speak with your advisor about things that may have changed. The fun part is speaking about the things on their bucket list they want to check off in the upcoming year. It’s my job to figure out how they’re going to pay for that.

Every 3 to 5 years, isn’t often enough.

You have to understand, not only is the world changing with markets rising and falling due to events half a world away, but our individual goals, aspirations, and personal lives change.

All of those things not only affect your life in the here and now…but also can drastically change how much money you’ll have in retirement. Keeping your plan up to date can help keep you on the right path.

This year, how much time will you spend planning a vacation?  How much time will you spend mowing the grass and cleaning up the yard? How much time will you spend in front of the television? Or driving to and from work? It’s a countless number of hours- even entire weeks of your life.

But how much time will you spend this year planning for your retirement? Be honest with yourself here. Remember, this is an event that could last 30 – possibly as much as 40 years of your life.

Most people won’t spend 10 minutes planning for their retirement this year – mostly because they don’t know where to start. We recommend you work with a qualified financial advisor who specializes in creating comprehensive income-focused retirement plans.