There's a TV advertisement out now depicting a couple doing everything they can to avoid sitting down and talking about retirement planning. They go to great lengths to avoid discussing it, including doing the tasks at the bottom of many households' to-do list--cleaning out the gutters, scrubbing the deck. "Sorry honey, I can't talk about it now, I have to . . . "
- The only way to plan for retirement is to get your situation into good planning software.
- Planning starts with how much you save. Saving consistently will allow you to plan for an earlier retirement.
- Taking more risk with investments when you're young is a sound strategy for planning.
It's an amusing take on a serious topic. Indeed, far too many people never do get around to talking about it, or end up talking about it much later than they should. (We hope their gutters are clean, anyway.)
We have written before about retiring early, and about contributing as much as possible to a retirement plan, and how much money you need to save before retiring. Many of the principles in those articles apply to the more general topic of how to plan for retirement in the first place. Let's run through the basics of how to plan for retirement now.
Save, Invest, Repeat
Planning for retirement starts with saving for retirement; you won't be able to retire if you don't have any money. (Relying on Social Security alone won't cut it.)
But you can't just put it in a piggy bank, or even a real bank. You have to invest it.
If you're relatively early in your working life, get in the habit of saving 10% of your pretax income to start with. Having a portion of your paycheck put into a 401(k) is normally the best option, as it's handled automatically, and you won't even think of it as spendable. A 401(k) is a good option too because your employer will give you investment options to choose from, so you won't need to open a brokerage account.
Not that you shouldn't have a brokerage account too. With a brokerage account, you can open an IRA account, and start contributing to that too.
After a little while, you should have a decent handle on your saving habits and tolerance for the ups and downs of the stock market, such that you'll be able to reasonably project what your investment balances might look like 10 or 20 years or more from now--if you use the right tools (more on this below).
When you're younger you should be taking way more risk in your IRA or 401(k) than you do when you're older. Since you will you likely not touch this money until your 60s, you won't worry about the day to day fluctuations in the investment values. So your IRA or 401(k) is a great place to take on more risk in equities, international investments, and even emerging markets. Over longer time periods the returns on more risky investments almost always surpass less risky investments.
What are your retirement goals? List them out, and prioritize them.
There's a decent chance you won't be able to reach all of your retirement goals, and that's OK. What are the ones you can't do without? Incorporating the must-have goals into your retirement plan will help you understand what will really be necessary, financially, to make them happen.
For example, let's say you want to fund a 529 plan for a grandchild, travel internationally for the first 10 years of your retirement, and purchase a condo somewhere warm for use in the winter months. Which of these gets top billing, and which of these gets pushed down the list if necessary? It's very important to consider the priority of each goal well before actually retiring. After running the numbers (and we're getting to how to do that next), if you find you won't be able to hit all of your must-haves, it may be time to revisit the Save-Invest-Repeat steps above and see if you can't sock away a little more money.
Putting It All Together
Once you have all of the above items dialed in, you can start running some calculations and see where you need to make adjustments. You must run your retirement numbers to know where you stand. Guessing or estimating in a spreadsheet is a terrible and dangerous idea.
In a previous article, we talked about the levers available to you when thinking about retirement:
For example, say you run the numbers, and it looks like you're going to come up short if you retire at 65 like you want to. What can you do? Going down the list above, you can:
- Save more
- Spend less
- Change how you're investing your money
- Reprioritize your goals
- Retire later
- Some combination of the above
Use The Right Tools For The Job
So how can you figure all of this out? What kind of calculator or program can handle all of this information?
May we suggest WealthTrace? Our program allows you to see the effects of changing up any of the five items above, and accounts for taxes, Social Security, and lots else as well.
WealthTrace does cost money after the trial period is over. Usually, free is good. But sometimes, free is dangerous.
As purveyors of planning software that costs money, we admittedly have a horse in this race. We have the motivation--our paying subscribers, and the desire to get more of them--to make sure that our planning software is as comprehensive and accurate as possible. We have financial professionals as clients, and they keep us on our toes: If something doesn't look right, they'll call us out on it, and we had better have some answers for them.
By contrast, a site with some free financial calculators might just be in it for the eyeballs--that is, all they need are people visiting the site to get revenue from site advertisers. There's often very little accountability.
OK, we'll get off our soapbox about this now. In short, though, it's prudent to treat free financial planning advice the same way you would treat discount sushi: with skepticism.
Sign up now for a free 14-day trial of WealthTrace to find out how well-positioned you are for retirement.