Today’s retirement looks very different from those in past generations. No longer are workers employed at the same company throughout their career and retire with comfortable pensions. Today, the responsibility for a quality retirement lies on the worker. Social security will barely keep you above poverty levels and is not designed to sustain a meaningful retirement.
You are responsible for prudently putting money away and to rely on those investments to adequately grow in order to live comfortably during your retirement. Today’s average retiree must fund 20 or more years, if you retire at the full retirement age of 66 or 67. If you choose early retirement at the age of 62, count on paying for 25 years or more.
The market performance of investments and debt accumulation weigh heavy on your mind because they threaten to derail the best laid plans. The past decade has seen above average market volatility, which has whittled away at retirement savings. You have survived a housing crash and financial market crash which has left losses in both housing prices and investments. If you were counting on increasing home values as an asset, you may have lost a large percentage of your nest egg.
Easy credit has left those 50 and over with more debt than any other generation, much of which is being carried into retirement. Refinancing homes to pay for vacations and credit card debt became common place and resulted in millions of Americans owing more than their homes were worth. The tide is slowly turning as home prices are once again on the rise, but it may be too late to count on substantial equity to fund retirement expenses.
Low interest rates have brought about the lowest mortgage rates seen in years, if you are able to qualify for a loan. These lower rates have done little to lower credit card rates, which is where many Americans struggle today. Low interest rates have also impacted conservative investments, reducing returns to below inflation for those seeking stable retirement vehicles.
Unable To Retire When Planned
Working longer is a common strategy if you are behind on your retirement planning. This can be a viable strategy if you are able to maintain your job and are in good enough health to do so. For those who are not able to continue in a current job, part time work can also be a backup strategy. The challenge is that just working longer is not likely to improve your financial situation, unless you have a deliberate plan to eliminate debt and increase savings.
Developing a Retirement Plan
It is never too late to plan for retirement. Retirement planning should address the problem of too little time and too much debt. A plan should include the following five components:
• Cash flow during retirement
• Emergency fund
• Current investments
• Current debt and debt payments
• Reducing expenses to meet long term goals
How much will you need each month in cash flow during retirement? This requires looking at current monthly expenses and debt payments. How much of that will be carried into retirement. Also consider what activities you enjoy and want to participate in. Many seniors calculate they will need between 70 and 80 percent of current cash flow. The more debt you eliminate the less you will need each month to live comfortably.
Once you have determined the amount needed each month, subtract social security payments and pensions. The remaining balance is what you will need to cover through your investments, employment or other income streams.
Establish an emergency fund to cover unexpected costs that arise. All budgets are subject to change because things break, you get sick and other costs come up that you did not plan for. An emergency fund will enable you to cover those costs without tapping into retirement funds or increasing debt.
Where are your investments and what rates of returns are you achieving? Rebalancing accounts based on performance and costs will help ensure you are in investments that are appropriate for your needs and your comfort with risk. Just putting money in a 401K and never looking at it can lead to higher fees, higher risk and lower returns than can be gained by adjusting the portfolio periodically. The final investment balance will be determined by how much you put in and how much you are able to make the account grow.
How much debt do you currently carry and what are the monthly payments? Imagine a retirement without these payments and it is easy to see you can live on substantially less if you did not have credit card debt, student loans and mortgage costs. Mortgage payments often take up 30% of household income. If your credit card payments are $1,000 or more, you could potentially reduce needed retirement income by 50%, if you are able to eliminate your debt before retirement.
Where can you cut expenses in the short term to meet long term goals? They say the definition of insanity is to do the same thing over and over but to expect different results. How often have you thought you could continue to live the same way and suddenly you would be able to “find” the money to pay for retirement or pay off debt? In order to accomplish a comfortable retirement and live debt free, changes must be made with respect to how you spend money.
The goal of any retirement plan is to increase payments towards debt and also increase contributions towards retirement accounts. This will require a change in lifestyle in order to meet those goals.
If, upon reflection, you find that you will not be able to increase debt payments and your retirement contributions, it may be time to get professional help. Debt resolution companies like Strategic Consulting offer a free consultation and can help you evaluate your current debt situation. They can also provide workable solutions to achieve your goals.
Many financial Advisors typically offer a free initial consultation and can evaluate your current investment strategy and help you create a plan for increasing contributions towards retirement savings.
It is easy to procrastinate with things that are overwhelming and confusing, especially when you don’t see an immediate solution. Even if you are afraid of what reality will be, the longer you put off addressing retirement needs, the worst your retirement will be.
You might think, “I’ll just work ‘til I drop.” But what happens if you are no longer able to work because of an injury or a medical condition? What happens if you are laid off before you want to retire? If you plan, you can choose to work into your retirement years, but it will be because you want to, not because you have to.
Without planning you could end up being a burden on your children or living in poverty. This reality can be prevented by getting back on track today, and making retirement concerns your first priority.