by Joe Hearn | Apr 26, 2013 | Retirement
The markets have done great lately, but there will inevitably come a time when fear returns and indexes drop. After all, that is the nature of markets.
While we can’t control the ups and downs, we can control things like how much we’re saving, how our assets are allocated and how much debt we have. Focus on those things and you’ll be less likely to stress about swings in the market. You’ll be able to keep calm and retire on.
Just for fun I had my designer put together a little reminder for you (hat tip to the famous “Keep Calm” poster from World War II). You can download it here: Keep Calm Poster
Have a great weekend!
~ Joe
by Joe Hearn | Apr 24, 2013 | Debt, Income, Retirement
“When can I retire?” I get that question a lot. If you’re curious about the answer, look no further than your retirement budget. The more money you want to spend during retirement, the more you’ll need to save before you get there and the longer you’ll likely need to work. It stands to reason then, that you can probably retire sooner if you can figure out a way to spend less during your golden years. What are some ways to downsize your expenses without downsizing your dreams for retirement?
Think Big
It has almost become dogma over the last decade that financial security comes by giving up things like your daily latte. That advice can certainly help you sock away a few extra dollars over the years, but if you’re getting close to retirement and find yourself tens (or hundreds) of thousands of dollar short of your goal, drinking Folgers instead of Starbucks isn’t going to solve your problem. It’s just not a big enough line item in your budget. If you want to make a big impact, you need to focus on big expenses.
According to a recently released report by the Social Security Administration, the two biggest expenses for most retirees are housing (35 percent) and transportation (14 percent). Said another way, almost half of your retirement budget will go to pay for the roof over your head and the vehicles in your garage. Let’s look at an imaginary couple to see how cuts in those areas can make a big difference.
John and Linda would like to retire next year. They decide to hire an adviser to look over their plan and, much to their dismay, the adviser tells them that they need to save another $300,000 to adequately fund their retirement. At the rate they are saving that would mean delaying retirement for another 10 years. Instead, they look at their retirement budget for ways to cut back.
With the kids gone, they have more space than they need, so they sell the house for $250,000, move into a $150,000 condo and pocket the extra $100,000. With carpooling and soccer games a thing of the past, they trade in their SUVs on two smaller cars (net gain $20,000) and even kick around the idea of sharing a car once neither of them is working. The smaller house and more fuel-efficient cars also means that they’ll be spending about $500 less each month ($6,000 per year) on taxes, utilities, gas and maintenance. Assuming a 4 percent withdrawal rate, that $6,000 annual savings means that they can get by with $150,000 less in their nest egg.
The total benefit, then, from cutting back in just those two areas was $270,000 (or 67,500 lattes). Not bad. They still have $30,000 to go, but at the rate they’re saving they should be able to set that aside and still retire next year as planned.
[Note: To consider ways to trim your own budget, you can download a free retirement budget worksheet at www.intentionalretirement.com/budget.]
Retire Debt
Another way to increase retirement security and perhaps even retire sooner than expected is to eliminate debt. It used to be common for people to enter retirement with little or no debt. Unfortunately, that is no longer the case. According to a recent study by the Employee Benefits Research Institute, 65 percent of American families with a head of household age 65-74 had debt. The age group with one of the biggest spikes in debt was 75 and older.
Not surprisingly, debt makes it harder to fund your retirement. It cuts into your cash flow and increases the risk that you will run out of money. Again, let’s assume that you can draw 4 percent per year from your assets during retirement. That means that for every $1,000 in annual income that you want during retirement, you’ll need $25,000 in savings.
Look at your current budget. How much do you spend each year on debt payments (e.g. mortgage, car, credit cards)? Multiply that number by 25. How much is it? $250,000? $500,000? More? That’s how much you’ll need to save in order to service that same amount of debt in retirement. As you can see, retiring will be much easier if you retire your debt first.
So as you plan, don’t think of retirement as a particular age or work status. Think of it as the time in your life when you can afford to pay your bills through means other than your job (e.g. personal savings, pension, Social Security).
When you look at it that way, it becomes clear that you can reach your retirement goals from two different directions. “Save more for retirement” is certainly one way, but “spend less in retirement” can be just as effective.
~ Joe
Note: I first published this article in the Omaha World Herald.
by Joe Hearn | Feb 22, 2013 | Lifestyle Design, Pursuits, Retirement
Note: Welcome to all the new readers who found us from the article I did at MarketWatch this week. I’m glad to have you on board. In today’s post I’m sharing that article with IR readers, so sorry if you’ve already seen it.
I have always looked up to Theodor Geisel, better known to millions as Dr. Seuss. As a writer myself, one of the qualities I admire most was his ability to take complex ideas (e.g. learning to read, racial equality, materialism) and make them engaging and easy to understand for readers (e.g. The Cat in the Hat, The Sneetches, How the Grinch Stole Christmas).
Having read a biography on Seuss, I knew that his birthday was just around the corner (March 2), which got me thinking: If Seuss were still with us, how might he have used his considerable talents to explain a complicated and sometimes boring topic like retirement planning?
Of course we’ll never know, but I thought I’d use his rhyming and poetic meter as inspiration and take a stab at it myself. The result is the poem below called ‘Someday’ is Here!
‘Someday’ is Here! [Click here for an illustrated version]
Finally!
You’ve made it.
After 40 years and a day
Of working and toiling and slaving away.
You’ve got money in the bank
And time on your hands
Now is the time to make some great plans.
There’s only on problem
A big concern, really.
If you want a great life then you really must hurry.
You see, all these years
You’ve heard experts opining
That your primary worry should be money and timing.
Those are vital, for sure.
But, take care to remember
If life were a calendar
You’d be in September.
The clock keeps on ticking
It gets louder each year.
You’ve spent years saying “Someday”
Well, “Someday” is here.
It’s time to stop dreaming
And actually DO.
That is my primary advice for you.
So how does one start?
Where to begin?
Grab a pencil and paper and let’s jump right in.
The first thing to do is to ask yourself this:
What types of things bring retirement bliss?
Don’t try to please others.
We’re talking about you.
What is it that YOU’VE always wanted to do?
Maybe that’s travel or volunteering to help others.
What would it be if you had your druthers?
Once you know that, then you’re well on your way.
But there are a few other things I should probably say.
First, don’t forget friends.
In life they’re the glue.
They hold everything together.
Otherwise it’s just you.
And while friends are important,
Don’t forget about your spouse.
If you’re happy together
You’ll have no reason to grouse.
So work on your friendships and marriage for sure.
What else? Let me think?
There are two or three more.
Oh yes. Now with plans and people in order
You can shift your attention and start to re-order.
Your priorities that is. Your To-Do list is jumbled.
With all sorts of things you should probably fumble.
Get rid of the extra and purge the redundant.
Once you do that life will be more abundant.
So that’s a few things that will get you ahead.
But remember, they won’t help a bit if you’re dead.
So get yourself healthy and lose the spare tire.
If you need a few pointers, call your doc and inquire.
Before we wrap up, a quick review.
What are the things you really MUST do?
Have money and plans. Relationships too.
A good healthy body and priorities not askew.
Do each of those things and you’ll be ahead by a mile.
Because those are the things that make retirement worthwhile.
[Click here for an illustrated version of the poem.]
Enjoy your weekend!
Joe
I originally published this article at MarketWatch.
by Joe Hearn | Jan 7, 2013 | Asset Allocation, Debt, Investing, Retirement
Just like it’s a good idea to get a health checkup every year, it’s a good idea to get a financial checkup as well. Doing so can help you detect problems early (while they’re still treatable) and will also help you gauge your progress and make sure you’re on track for a healthy retirement.
To help, I put together this Financial Checkup Checklist with areas that you should be reviewing. Go through it and then touch base with me if you have any questions or there’s anything I can help you with. Have a great week!
~ Joe
by Joe Hearn | Jan 3, 2013 | Debt, Estate Planning, Retirement, Taxes
Well, another year is in the history books. Where does the time go? It seems like just yesterday that I was singing along to Prince’s “Party Like It’s 1999” and worrying that my coffee machine was going to be a victim of Y2K and here we are a “Baker’s Decade” into the new millennium.
As the years go by, I, along with millions of others, find the idea of retirement morphing from a vague concept to an impending reality. The signs are subtle at first. An AARP magazine in the mailbox. A “take this job and shove it” daydream at work. A lingering glance at the orange and red sections of the USA Today weather map. If retirement looms large on your horizon, then there’s no time to waste. Below are 7 resolutions for the New Year to make sure that your planning is on track.
Recalibrate after the “Fiscal Cliff.” As the dust settles in Washington, there are several variables in your retirement plan that you may want to review. In particular, any changes in your tax bill can affect everything from your planned retirement date to your distribution strategy. Entitlement reform was delayed (color me surprised!), but any eventual changes to Medicare and Social Security will also affect your retirement. Schedule a meeting with your adviser to factor in these new variables and make sure that your plans are still realistic.
Increase your contributions. Are you getting a raise in 2013? Sure you could use that to upgrade your iPad or buy tickets to the soon to be announced Rolling Stones tour, but a third option would be to route that extra cash into your retirement accounts. Contribution limits for 2013 are increasing to $5,500 (plus an additional $1,000 for those over 50) for IRAs and $17,500 (plus an additional $5,500 for those over 50) for 401(k)s.
Create a debt payoff plan. If you subscribe to the 4 percent withdrawal rule, then for every $1,000 in income you need to generate during retirement, you’ll need $25,000 in assets. Doing some simple arithmetic, it’s easy to see that retiring with a mortgage, car payment or other debts can add hundreds of thousands of dollars to your “Number.” Reduce that burden by committing to a plan to retire debt free.
Get on the same page with your spouse. Try this experiment. At the dinner table tonight say “I can’t wait to retire in 2016 so we can move to San Carlos, Uruguay and I can realize my dream of becoming a real life gaucho.” The response that you get will show you how important it is to be on the same page with your spouse when it comes to your retirement planning. Now that the conversation is going, spend some time talking through your hopes, dreams and plans so that you can iron out any differences and compromise on a plan.
Take a mini-retirement. You wouldn’t want to get all the way to Uruguay only to second guess the whole gaucho thing. As you get closer to retirement, you should start using whatever vacation and sick time you have to test drive your plans. A mini-retirement is a great way to learn more about a place or to experiment with your retirement budget. Use what you learn to refine and improve your plans.
Set aside your first year of expenses. In case you hadn’t noticed, the financial markets have been a bit—what’s the word?—schizophrenic the past decade or so. If retirement is just around the corner, you run the risk of having to withdraw money from your nest egg at a time when your investments are performing poorly. Experts refer to this as sequence risk. To avoid that problem, set aside one year of your retirement expenses in cash. If the markets are doing well, you can draw income from your investments. If markets are doing poorly, you can draw from your cash and give your investments a chance to recover.
Update your estate plan. Estate and gift taxes were scheduled to change drastically in 2013, but got a last minute reprieve with the deal in Congress. The estate tax rate increased to 40 percent from 35 percent, but other than that, most existing estate tax rules were made permanent. Work closely with your attorney and financial adviser to make sure that your plan is up to date and designed to minimize taxes. Also be sure to have a strategy in place to cover any potential liability (e.g. life insurance) and make sure that your beneficiary designations and powers of attorney are up-to-date and reflect your wishes.
That list of resolutions makes me long for the days of simpler goals like “join a gym” or “quit smoking.” But hey, no one said retirement was going to be easy. If it was, the world would have more gauchos.
I originally published this article at www.marketwatch.com. Photo by Sacha Fernandez. Used under Creative Commons License.
by Joe Hearn | Dec 17, 2012 | Asset Allocation, Investing, Retirement
If you work with a financial adviser, it’s a good idea to get together at least annually to review your accounts. As we get ready to transition into a new year and as our government grapples with the issues surrounding the “Fiscal Cliff,” now may be a good time to call your adviser and schedule that meeting. Below are seven questions you can ask to make sure that your retirement planning stays on track.
Are there any actions I need to take before the end of the year? Most of the questions below can wait until next year, but for obvious reasons, you need an answer to this one before December 31. With changes expected to both dividend and capital gains taxes in 2013, review your holdings and ask your adviser what actions, if any, you should be taking before yearend. Also, if you are 70 ½ or older you will likely need to make a Required Minimum Distribution (RMD) from your retirement accounts before the end of the year.
How did my investments perform relative to their peers? It is difficult to gauge performance by returns alone. If your stock mutual fund drops 20 percent does that mean that it’s bad? Not if similar funds dropped 40 percent. When monitoring performance, it’s important to have either a benchmark or peer group that you’re measuring against. Your adviser should be able to review your holdings and see if the managers you’ve hired are earning their fee. If so, great. If not, changes may be in order.
Is my asset allocation still appropriate? Your portfolio is likely made up of a variety of different asset classes such as U.S. stocks, foreign stocks, small cap stocks, government bonds, corporate bonds and municipal bonds. How much you have in each area is referred to as your asset allocation. The balance will vary based on a number of factors such as your age, risk tolerance, goals and outlook for the global economy. As your circumstances change and as market movements alter your allocation, it is important to meet with your adviser and rebalance your holdings to get them back in line.
Is the amount of risk I’m taking still appropriate? Investing too aggressively can result in significant losses to your portfolio. Investing too conservatively can mean that your investments don’t keep pace with inflation. Either of those outcomes will reduce the purchasing power of your money in retirement. Work with your adviser to make sure that the amount of risk you’re taking is still appropriate for your circumstances.
Am I saving enough? There are a number of assumptions that go into calculating how much you need to save in order to retire. Even small errors in those assumptions can have drastic changes in the predicted outcome. Rather than making a plan and then waiting 20 years to see if it works, it’s important to make small adjustments along the way. With each new year, you have new information relating to things like investment returns, savings rates and taxes. It’s important to evaluate that new information and ask your adviser “Based on these new realities, am I still on track to reach my retirement goals.” If the answer is no, talk through any needed changes.
Is my withdrawal rate sustainable? Of course, this question is only appropriate if you’re already retired and drawing income from your portfolio. Running out of money is a major fear for many retirees. To avoid that problem, it is important to have a sustainable withdrawal rate. A suitable rate depends on a number of factors including investment returns, inflation, longevity and even luck. A popular rule of thumb is to limit withdrawal rates to 4 percent, but everyone’s circumstances are different, so work closely with your adviser to make sure your income lasts.
Do you recommend any other changes? A good adviser is realistic and honest. Rather than telling you what you want to hear, he or she is paid to give you straightforward advice that will help you accomplish your goals. Not only that, but a good adviser should be able to look at your total financial picture and offer comprehensive advice. Take advantage of that knowledge and experience and ask what, if any, other changes are necessary.
The annual review is an important element to the client-adviser relationship. It is an ideal time to evaluate performance and make necessary adjustments to help you reach your retirement goals. Pick up the phone and schedule a meeting today so you can start the New Year off right.
~ Joe
I originally published this article at www.fpanet.org.
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