In a field one summer's day a Grasshopper was hopping about, chirping and singing to its heart's content. An Ant passed by, bearing along with great toil an ear of corn he was taking to the nest."Why not come and chat with me," said the Grasshopper, "instead of toiling and moiling in that way?""I am helping to lay up food for the winter," said the Ant, "and recommend you to do the same.""Why bother about winter?" said the Grasshopper; we have got plenty of food at present." But the Ant went on its way and continued its toil. When the winter came the Grasshopper had no food and found itself dying of hunger, while it saw the ants distributing every day corn and grain from the stores they had collected in the summer.We chalk this one up to Aesop and the following to my friends at Buckingham Asset Management who devised the baker's dozen of tips toward a well-planned retirement.1) Start Saving Early. The young people may have trouble understanding how quickly life moves, so let's take an example. A 35-year old starts saving $5,000 each year for 30 years. With an assumed seven percent compounded annualized return, our hero would have have saved some $150,000 over the 30 years but yielding a portfolio of $505,000.
2) Develop a Plan. Today, you have to spin out your life expectancy to some 30-35 years from the time of retirement. The financial planners I speak to spin out a 65-year old to age 100. Think about it. Your money has to outlive you a longer period of time than it did, say, your parents. Therefore, you need an investment plan that will meet your goals.
3) Assume Modest Rates of Return. I realize I said seven percent in item 1 but let's be a little more conservative and realistic in today's market. Look at between four and five percent. Conservative, admittedly, but plan properly. If the rate goes higher, all the better.
4) Caution in Those First Years of Retirement. How much money can you withdraw and use in those first few years? You don't want to overspend and find yourself on the short end a few years down the road. Realistic thinking is imperative.
5) Assess Spending and Tax Requirements. Don't underestimate your spending needs as well as the tax rate in retirement. A recent study conducted by AON Consulting and Georgia University discovered that the average person needed to replace almost 80 percent of their pre-retirement income. High, eh? Just consider the increased medical insurance.
6) Plan to Live Longer. Again, watch that 30-35 year period. Half of us will live longer than our life expectancy. So, you have to make sure your money will outlive you, even by a day.
7) Assess Risk Tolerance. You have to arrive at a good mix for you. Your financial planner can help you in this regard assessing all of the various factors that go into portfolio building. You don't want to be too conservative and yet you want to make sure you are not putting yourself at too much risk.
8) Possible Early Retirement. More and more people are opting out at an earlier age. Buckingham says it hopes it will be because you can afford it. But job loss or health can force it on you. There has to be a plan in place.
9) Cost of Living. The risk of rising inflation is much more of a concern once you retire than it is when you are holding down a steady job. But remember, medical costs have been rising faster than overall inflation. And who knows what will happen to Social Security and even Medicare. Take a good look at your pension plan to make sure it is indexed to inflation.
10) The Family Affair. That clearly is a factor here for, as one example, you have to plan for your surviving spouse when considering your defined benefit plan payout options. Also, you need to accurately assess living expenses upon the death of a spouse. Some expenses go down but if both of you have been receiving Social Security payments, guess what? So will those benefits.
11) Minimize Risk. One aspect that may or may not apply, depending on your financial position, is long-term health care coverage. It may or may not be right for you but if we are slated to live longer, you need a hedge against these costs. Something to consider.
12) Maximize Social Security Benefits. Taker a look at what's available. Do you wait until full retirement age to take the benefits or do you opt at an earlier age? Or even wait until perhaps age 70 to take advantage of increased benefit payouts?
13) The IRA. If your goal is to leave as much a possible to beneficiaries such as children or grandchildren, maybe you might consider taking certain steps to ensure that your IRA grows tax-deferred for as long as possible after your death.
Moral of the Aesop fable? It is best to prepare for the days of necessity.
Basically, no one is saying to have to take every step here but you certainly should consider many of them, if not all. Your financial advisor is there for you to ease the trip. Are you the live-for-the moment grasshopper or the industrious plan-ahead ant.
One final thought. Time moves very quickly...faster than you can imagine. Aesop is indeed quite right!
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