by Joe Hearn | Feb 6, 2012 | Asset Allocation, Debt, Income, Retirement
(Note: This is Part 2 in a three part series that I did for the Omaha World Herald on retirement planning for different life stages. I’m re-posting it here for all of you who don’t live in snowy, freezing Omaha!)
Forty-five is an interesting age. It’s like the Junior High of aging. Too old to fit in with the kids at the Kanye West concert, but too young for the senior discount crowd at Denny’s. Exactly halfway between 25 and 65, it’s like a weigh station between the carefree and exciting days of your 20s and what will hopefully be the carefree and exciting days of retirement.
With 20 years to go, it’s a good time to reflect on the planning you’ve done so far and see if you are on the right track. If not, you’ve still got time to do something about it, but the clock is ticking. Here are 20 ways to make sure you’ll have enough in 20 years.
1. Actually figure out what you need. Too many people retire based on their birthday instead of their bank account. Knowing how much you’ll need will help you save with purpose and intention. A good rule of thumb is to shoot for a nest egg that is 25 times larger than the amount you want to take from it each year.
2. Get out of debt. No one in the history of the universe has gotten rich spending money they don’t have on things they don’t need. You won’t be the first to crack the code.
3. Perform budget triage. Most budgets don’t bleed to death from a gaping wound, but rather a thousand little cuts. Wasting $20 per day for 20 years will shave about $334,000 from your nest egg (assuming an 8 percent annual return).
4. Beware any sentence that begins with “Hey dad. Can I…” People in their teens and twenties are incapable of ending that sentence with anything that doesn’t cost you money and put a hole in your nest egg. Whatever the request, just answer with a firm “Yes, as long as I can move in with you in 20 years because I had earmarked that money for retirement.”
5. Make your saving automatic. Saving is like going to the gym or eating your vegetables. You know you should do it, but it takes discipline. Make it easy on yourself by having money automatically deducted from your checking account or paycheck each month.
6. Focus on the basics. Saving and investing doesn’t need to be complicated. You can contribute $17,000 to a 401(k) and $5,000 to an IRA each year. Start there. Maxing out your contributions for 20 years would add about $1,006,000 to your nest egg (assuming an 8 percent annual return).
7. Refinance. Interest rates are at historic lows. If you still owe money on your house, consider refinancing into a loan with the same payment, but a lower rate and shorter term. You’ll save thousands in interest and you’ll enter retirement with no mortgage.
8. Get healthy. In 1900 the three leading causes of death were influenza, diarrhea, and tuberculosis. Today they are heart disease, cancer and stroke. All three of those diseases are expensive (even with insurance) and heavily dependent on things like diet, exercise, smoking, drinking, and stress.
9. Beware midlife crisis purchases. If you’re tempted to buy a Hemi powered midlife crisis-mobile, don’t. Buy a nice used grocery getter instead and put the difference in your IRA.
10. Add up everything you’ve spent during the last 12 months on beverages (e.g. soda, red bull, alcohol, venti non-fat no foam double shot hazelnut lattes, etc.). If the number is greater than the world median annual income (about $1,700), reacquaint yourself with the benefits of water.
11. Make it personal. You’re not planning “retirement,” you’re planning “your retirement.” Once you realize that and spend some time thinking about the things you are really looking forward to, you’ll be incredibly motivated to make it happen.
12. Avoid mistakes, especially those that result in large investment losses. At 20 you had plenty of time to recover. At 45, large losses are like meteors to dinosaurs. They are extinction level events. Don’t put all your eggs in one basket (like your own company’s stock) or make questionable investments (like that can’t miss tip from your brother-in-law).
13. Meet with a trusted adviser annually. Answer three key questions at each meeting: How did my investments do this past year? Am I still on track for retirement (see number 1)? What changes do I need to make?
14. Work on your marriage. Middle age is a risky time for you and your spouse. Having a happy marriage is reason enough to put forth the effort, but if you need something more, remember this: A sure fire way to derail your retirement is to divide all your assets in half.
15. Don’t be too conservative. The markets have been crazy these last few years and a lot of people responded by moving everything to cash. That may help you sleep well, but it won’t help you grow your assets and outpace inflation. Repeat after me: Safe is risky.
16. Review your asset allocation. If instead of moving to cash, you ignored your investments through the recent market turmoil, there’s a good chance that the ups and downs threw your portfolio out of balance. Research shows that your asset allocation is responsible for 90 percent of your investment returns. Work with your adviser to rebalance to a more appropriate allocation.
17. Downsize. Once the kids are gone, reconsider the necessity of having a house big enough to have its own gravitational field. A smaller place means that you’ll be spending less on your mortgage, heating, cooling, insurance and property taxes. Invest that savings for retirement.
18. Take advantage of peak earning years. You’ll likely make a lot of money in your 40s and 50s. As the kids grow up and move on, be sure to make your peak earning years your peak savings years as well.
19. Beware of fees. A good adviser or mutual fund can add value, but pay close attention to the fees you are paying. It’s not just the fees, but the compound interest those fees would have earned had they stayed in your account. Over a 30 year period, an extra 1 percent in fees is enough to shave 25 percent off the ending value of your investments.
20. Don’t retire early. Calling it quits before your full Social Security retirement age could mean a 20 percent permanent reduction in benefits. It’s worth remembering that the number one reason people retire early is poor health (see number 8).
Unless you’re a trust fund baby or a lottery winner (and let’s be honest, they all quit reading after number 3), you’ve probably got a little work to do. But have no fear. You can do a lot in 20 years. The key, as with most things, is to start. Ready? Go.
by Joe Hearn | Feb 1, 2012 | Investing, Pursuits, Retirement
There have been quite a few new readers at Intentional Retirement lately and I’m glad to have you all here. Each month, I post a quick summary of the new articles at the site for anyone who may have missed something. January’s articles are below.
We’re one month into the New Year. How are you doing with your plans and goals? No worries if things aren’t perfect, but stick with it. Just like compound interest can produce amazing results with your investments, compound effort can produce amazing results with your life. Don’t hesitate to touch base with me (or the rest of the IR community through the comments section after each post) if I can ever help.
Joe
by Joe Hearn | Jan 31, 2012 | Investing, Retirement
We’ve all heard the expression “Give a man a fish and feed him for a day. Teach a man to fish and feed him for life.” When it comes to our kids and their finances, it’s sometimes tempting to give rather than teach, because we want to help them out and we want them to be happy. We could do them a great service, though, if we took a little time to pass on the lessons we’ve learned (sometimes painfully) about how to save and handle money.
In that spirit, I’ve included an article in today’s post that is focused on helping people in their 20s and early 30s plan for retirement. It is the first installment in a three part series that I am doing for the Omaha World Herald on retirement planning for different life stages.
As you’ll see below, starting early makes a HUGE difference. If you know someone who could benefit from that advice, I’d really appreciate it if you forwarded them the article. You can also share it to twitter or facebook using the buttons below.
Thanks in advance! I’ve heard from several of you this week who needed help with one issue or another. Don’t ever hesitate to touch base if I can lend a hand.
Joe
Note: If any of the charts or other information don’t display correctly in the email version of this post, just click the post title to view it on the web.
Want a nest egg in 40 years or so? Start early. In fact, start now.
Steven Covey once said “Begin with the end in mind.” For people in their 20s, that is about the best retirement advice you will ever get. Why? Imagine your life 40 years from now. If the past is any guide, you will just be getting ready to transition out of work and into retirement.
Assuming all goes well, Future You will have a nice comfortable nest egg set aside and will be on the cusp of an exciting new phase in life. There’s just one thing. In order for Future You to have a shot at that comfortable retirement, Current You has some work to do. Thankfully, you have a lot going for you. What are the key ingredients to getting a healthy start?
Start early
Early in life, your biggest asset is time. Those extra years can make a huge difference when it comes to your investments. The chart below shows a hypothetical example of the benefits of starting early. It compares five people saving for their eventual retirement at age 65. They save identical amounts each month ($500) and earn identical rates of return (8 percent per year, compounded monthly) on their investments. The only difference is when they start. Molly starts at 20. It’s a stretch, but she makes it work. Kelly, on the other hand, spends his extra income on a steady diet of video games and Mojitos and doesn’t get around to saving until he hits 30.
How much of a difference do those 10 years make? About $1.5 million. Said another way, Molly saved $60,000 more than Kelly ($6,000 per year for 10 years), on the front end, but that extra money resulted in an extra $1.5 million on the back end. The crazy thing? She could have stopped saving at 30 and never added another dime to her account and she still would have ended up with more than Kelly. Behold, the power of compound interest.
The longer you wait, the more drastic the difference and the more you need to save to catch up. The second part of the chart below shows how much our fictional characters would need to save each month in order to end up with the same amount as Molly. Waiting until 50 to start means that Pat would need to save more than $7,500 each month to catch up. Niel would need to put away the equivalent of a new car each month. As you can see, starting early allows time and compound interest to do most of the heavy lifting.
Make it automatic
Saving for retirement takes discipline. That is especially true if you are in your 20s and won’t see the payoff for decades to come. It’s like making a car payment each month for a car that you won’t be able to drive until 2057.
Rather than relying on willpower, make your saving automatic. Have your employer take money from your paycheck each month to add to your 401(k). Set up a Roth IRA that systematically pulls money from your checking account. You can start with as little as $25 per month. After awhile you will get used to living without the money and you won’t even think about it. I believe it was Newton’s Third Law that said “For every dollar earned, there is an equal and opposite way to spend it.” Or something like that. Make it easy on yourself. Make your saving automatic.
Save enough
One of the most common questions that people have when it comes to setting aside money for retirement is “How much should I be saving?” The answer, of course, depends on your specific situation. Recently, a professor by the name of Wade Pfau has done some interesting research on this topic. He calls it the “safe savings rate.”
At the risk of drastically simplifying his research, this is the question he was trying to answer: How much does a person need to save in order to safely fund retirement even after the ups and downs of the market are taken into account?
His conclusion for someone in their 20s (a.k.a. someone who can save for 40 years)? Using historical market data and assuming an allocation of 60 percent stocks and 40 percent bonds, he found that someone saving for 40 years and then living for 30 years in retirement had a 100 percent chance of replacing half of their pre-retirement income if they saved 8.77 percent per year. Increasing the savings rate to 12.27 percent, resulted in a 70 percent replacement rate.
Of course past performance is no guarantee of the future, but his research is helpful in that it gives you a specific number to shoot for. Saving 10-15 percent of your income might seem like a stretch, but you don’t need to get there overnight. Start with something small, like 1 percent per year, with the goal of increasing it each time you get a raise. Combine that with the employer match on your plan (most employers will match a certain percentage of what you put in) and you’ll be at 10% before you know it.
Allocate Properly
Asset allocation (the breakdown between stocks, bonds and other asset classes) is a critical element to investment success. In fact, research shows that it is responsible for as much as 90 percent of return. The remaining 10 percent is determined by the specific investments you buy and when you buy them.
Work with a trusted adviser or the representative assigned to your plan at work to make sure your allocation is appropriate for your situation. Then review that allocation regularly and make changes as necessary.
Don’t raid the piggy bank
The average person changes jobs 5-10 times over a lifetime. Each time you change, it’s tempting to take the money from your 401(k) rather than rolling it over to an IRA or to your new employer’s plan. This is especially true if you have things like moving expenses or if you lost your job involuntarily and need some resources to make ends meet. Do everything you can to avoid taking these premature distributions. Not only will you pay taxes and a penalty (assuming you’re younger than 59 ½), but it also means that the advantages you gained from starting early go out the window.
The secret
The biggest objection to starting early is that it’s not easy to save at the front-end of your career when your income is limited and you have so many expenses like a new work wardrobe or furnishing your house or apartment. I’ll let you in on a little secret. It doesn’t get any easier. There will always be wants and needs competing for your limited resources. The key is deciding to start, no matter the amount, and then making saving a lifelong habit.
by Joe Hearn | Jan 26, 2012 | Pursuits, Retirement
Remember the Apollo program? Before going to the moon, one of the key challenges NASA had to overcome was figuring out how to get a rocket that weighed 6.7 million pounds and was 58 feet taller than the Statue of Liberty off the launch pad and into space.
The solution rested in a concept called Escape Velocity. It is the speed needed to break free of a gravitational field. To reach space, the rocket needed to go fast enough and far enough to outrun (or “escape”) the pull of gravity.
You can probably see where I’m going with this. As you transition into retirement, your career and other aspects of your pre-retirement life will be exerting their own gravitational pull. To overcome that pull and enter a new exciting phase, you need to reach what I call Retirement Escape Velocity (or REV for short).
Failure to reach REV means uncertainty, frustration and disappointment. Reaching REV means you finish your pre-retirement years well and launch into a new phase of meaningful pursuits. What are some ways to build up enough speed and momentum to reach your retirement escape velocity?
Have a goal. On May 25, 1961 President Kennedy set the goal of “landing a man on the moon and returning him safely to the earth” before the decade was out. That goal was a primary driver for everyone working on the project. Similarly, having specific goals can be an important driver of your retirement dreams.
Have a team and work together. At its peak, there were 400,000 people and 20,000 companies and universities working on the Apollo Program. When aiming for a big goal, it helps to have a good team. That means you should be on the same page with your spouse and working together toward a common end. It also means that you should have trusted advisers like your attorney, accountant and financial planner.
Overcome fears. Think of every major thing you’ve done in life like getting married, having kids, starting that new business, or setting a big goal. You likely felt some combination of fear, doubt, anticipation, joy and trepidation. But looking back on your life, those are probably the things that you’re most proud of; the things that brought you the most meaning and purpose. The same will be true of retirement if you reach for something great and overcome your fears.
Commit resources. Landing men on the moon required the largest investment by any nation ever made during peacetime. Money isn’t the most important element of a successful retirement, but it’s important. Resources can be like rocket fuel. Make sure you’re setting aside what you need.
Go in stages. Each stage of a Saturn V rocket was designed to burn for several minutes and propel the craft through a certain leg of the journey. Depending on your personality and circumstances, it might be wise to consider retiring in stages rather than all at once. This will allow you to adjust to the new reality and focus on the transition without feeling rushed or unprepared.
Examine your unique situation. Different planets have different pull. You need to be going 11.2 km/s to escape the earth’s gravity. To escape the sun’s gravity, however, you need to be going 617.5 km/s. Each of us have different careers and circumstances leading up to retirement. Some have jobs that they can walk away from at a moments notice. Others may be the owner of the business or a key person in the management chain and significant preparations need to be made in order to move on. Consider which you are and plan accordingly.
Spend time researching and testing. President Kennedy outlined the lunar goal in 1961, but the first manned flight did not happen until October of 1968. The period between was spent researching and testing. As you move towards retirement, test out your budget to see if it’s realistic. Spend time doing the hobbies and activities you have planned to make sure they fit you. Visit the area where you plan to retire so you can begin to meet people and put down roots. Doing these things will help you refine your plans and increase the odds that retirement will feel like a natural transition rather than a jarring change.
Have something that will replace the fulfillment you get from your job. Many of us derive a great deal of satisfaction from working. New retirees usually don’t miss their job per se, they miss the satisfaction and accomplishment that they felt from working. Make sure that you have meaningful pursuits planned for retirement that can fill any void created by quitting your job.
Have a countdown checklist. Each launch in the Apollo Program was preceded by a detailed countdown checklist to make sure that every step in the sequence of events was followed perfectly. Use the Retirement Countdown Checklist at www.IntentionalRetirement.com as a reminder of what needs to be done and when you need to do it.
Simplify. When an accident threatened Apollo 13, Gene Kranz was said to have focused his team by saying “Let’s work the problem people.” As you enter retirement, you need to simplify and work the “problem.” You should make both a “To Do” list and a “Stop Doing” list. The latter will help you transition out of certain commitments and responsibilities so you can reach REV and focus on your new life.
Avoid an explosion on the launch pad. There was enough fuel in a Saturn V rocket to cause a low grade nuclear explosion if it blew up on the launch pad. I promise you, no one wanted that to happen, least of all the Astronauts inside. Unfortunately, I have seen retirement for some people abrubtly ended by an explosion on the launch pad. Most often this is the result of a key mistake like having too much of one’s nest egg in a particular stock (employees of Enron for example). In order to reach REV, you need to get off the launch pad. Don’t do anything that would jeopardize that.
As you can see, the less prepared you are—financially, emotionally, strategically—the more likely it will be that your job and pre-retirement life will trap you in a perpetual orbit. To break free, follow the steps outlined above and your actions will propel you to an exciting new chapter in life.
Thanks for reading. Touch base if I can ever help.
Joe
by Joe Hearn | Jan 20, 2012 | Distribution Planning, Income, Retirement
Much of your retirement planning will revolve around your retirement budget. It will help determine things like:
- How much you need to save
- When you can afford to retire
- What types of things you can afford to do
- What your income sources will be during retirement
- How sustainable your distribution strategy is
With that in mind, I’ve put together a Retirement Budget Worksheet for you (see link below or visit www.intentionalretirement.com). Use it to begin mapping out your income and expenses during retirement. Feel free to forward it on to friends or family as well.
Retirement Budget Worksheet (PDF)
Thanks for reading. Have a great weekend!
Joe
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