Plan early for an effective retirement
Sunday, March 27, 2011
Bradley R. Newman
As people in their early to mid 40’s begin to seriously contemplate retirement planning for the first time, the concept of retiring becomes more of a reality and the likelihood of funding it often becomes a bit overwhelming. However, for people who have waited until they reach their mid to late 50’s before doing any planning, the concept of retirement is now an inevitability and the likelihood of being underfunded is terrifying.
The volatility of the investment markets over the past several years, combined with a healthy sense of uncertainty going forward, has left almost everyone feeling a bit anxious. However, proper planning can provide a sense of calm just by gaining an accurate assessment of your situation and creating a plan of action for reaching your goals.
What’s My Number?
Trite as the ever-present Wall Street commercials that focus on ‘your number’ have become, the idea of having a goal to achieve can be very reassuring.
The key is to have a goal that is rooted in fundamentally prudent assumptions (retirement date, post-retirement income needs, inflation, life expectancy, etc) and to go through a disciplined and structured planning process. The only thing worse than blindly moving toward retirement without a goal is diligently working toward a goal that is incorrect or not based in reality.
Don’t rely on a ‘rule of thumb’; while discussing some of the general premises utilized for estimating retirement can provide entertaining conversation among friends and colleagues, they are not appropriate methodologies for providing a clear quantification of your post-retirement income needs.
When Should I Start Planning?
The short answer is yesterday. Ideally, detailed retirement planning should begin in your mid 30’s to mid 40’s in order to establish a baseline from which adjustments can be made as you proceed toward your goals.
Unfortunately, most people wait until they are too close to retirement, 5-7 years away, before reviewing their situation in a thorough fashion. A late review is better than not looking at it all; however, if retirement is not adequately funded by that stage of your life your options will be limited and likely unpalatable. Beginning your planning at a younger age will provide more flexibility.
Make Adjustments Over Time
The other advantage to start your planning from early age is that it allows you to establish an appropriate asset accumulation track. Planning based on your current income and lifestyle will provide recommended levels of retirement funding that are practical and realistic to implement.
As your income, lifestyle and goals grow, incremental adjustments to your planning will allow you to modify your accumulation in a progressive and paced manner. Regular adjustments will allow you to methodically reach your goals without ever having to make painful increases to savings levels or difficult reductions in retirement goals.
Consider the Source of Your Advice
Be aware that the advice you receive can be skewed based on the interests of your advisor. For example, if you are using an advisor who is compensated by how much product you buy there is the potential that retirement needs could be inflated in order to increase the amount of product that you purchase.
Additionally, the offer of a ‘free’ or substantially discounted plan should immediately raise a red flag. Carefully examine the true benefit of the service being provided as well as whether you are being overcharged for other services to compensate for the planning. As with most things, you get what you pay for.
Use Your Planning Effectively
As you move through the various phases of life, it will be important to review your planning on a regular basis; a comprehensive review should be done every three to five years, or as notable changes occur in your life.
Prior to retirement it will be critical that you diligently follow your prescribed accumulation plan, and after retirement it will be equally imperative that you diligently follow your prescribed distribution plan.