Like a lot of things in America, retirement planning isn’t what it used to be. People are living longer; inheriting less; paying more for college, healthcare, and everything in between. But the main difference comes down to ownership—the need for individuals and families to formulate a plan as early as possible, and then proactively contribute.
No doubt, your parents’ approach to retirement looked a lot different. Past generations dedicated their careers to just one or two employers. At 65, a viable pension and Social Security check were waiting. Today, of course, defined benefit plans are all but nonexistent, and Social Security isn’t enough to sustain a comfortable retirement.
Complicating matters is our country’s collective hangover from the Great Recession. According to a Gallup report published last month, Americans (especially those in their 20’s and 30’s) have less confidence in IRAs and other 401(k)-type retirement accounts. Meanwhile, 37 percent (up 11 points since pre-recession surveys) expect they’ll rely heavily on savings accounts to comprise their retirement income. Yikes.
While we here at JFS don’t see these same attitudes playing out (rightly, our clients aren’t losing confidence in defined contribution plans), we do see a trend toward more conservative money management: new clients coming to us with too much cash in savings accounts and CDs, essentially settling for a 0.01% annual percentage yield. We also see folks who are avoiding a holistic retirement plan until well into their 40’s or 50’s because the whole topic seems overwhelming.
But retirement doesn’t have to be a source of stress. With a little bit of education you can take the steps you need to really own retirement planning—to get out in front of the challenge and tackle it on your own terms. So without further ado, here are some critical guidelines for retirement planning in 2016:
1. Form a detailed retirement plan—including goals and target income.
Do you really know how much money you’ll need to maintain your current lifestyle, or to enjoy the picture of retirement you have in mind (travel, philanthropy, spoiling the heck out of your grandkids)? You may have heard the retirement planning rule that advises future retirees to budget for 70 percent of their current income. It’s hardly foolproof. The truth is, retirement savings/retirement income goals should be carefully evaluated on an individual basis. Sitting down with a wealth advisor is a good place to start.
2. Work on budgeting and cash flow management.
Think budgeting is only for recent grads or struggling families? Think again. Regardless of their income bracket, most people will spend money that isn’t otherwise diverted (e.g. automatically allocated to a retirement account). Working with a neutral third party—someone who understands best practices for contributing to retirement plans, kids’ college funds, etc.—is a good way to take personal biases and emotion out of household allowances.
3. Balance your portfolio with proper asset allocation.
Have you ever come across an asset allocation calculator online? Financial planning tools like these may serve as a jumping off point—a way to begin thinking about your investment approach. But they’re too generic to drive actual decisions. Instead, having an individualized plan—one that takes future up markets and down markets into account—is critical. Guided by a skilled investment advisor, you’ll feel more confident staying the course during volatile markets.
4. Max out 401(k)s and IRAs to compound growth over time.
Ideally, you should be maxing out contributions to your 401(k) and/or IRAs—especially if you’re not already taking full advantage of your employer’s match. Many people have questions about compound interest, and whether or not money can grow faster with other investment options or retirement funds. If you have any specific questions about your retirement accounts, you’re welcome to contact us directly.
5. Partner with a Certified Financial Planner.
Although today’s retirement planning puts more onus on retirees themselves, we wouldn’t recommend tackling the process on your own. Join forces with a Certified Financial Planner (CFP®), a designation that means he or she is held to the highest standard (the fiduciary standard), and must act in your best interest at all times. CFPs tend to be more education focused; they will help you understand your options, rather than push you down a particular path.
Before deciding which advisor is right for you, be sure to do a transparency check. There are several firms who incorporate hidden charges, high fees, and commissionable products into their recommendations. Ultimately, no set of products will get you to your goals; comprehensive tax management and asset allocation will.
Want to learn more about market trends and financial matters that may impact your retirement plan? Visit our financial news and resources page.