A plan for retirement: Are you prepared?
We all dream of the day we clock out for the final time, retirement plan in hand, and begin spending our sunset years free from financial worry. And you’re smart — You pay yourself first by putting 10% of your salary straight into your 401k. Your portfolio is diverse and responsive to economic changes. You’re doing everything right. It’s as though you can already feel the Florida sun on your face as you push a disc across Del Boca Vista’s shuffleboard deck. Retirement is going to be good.But is that the reality? Do you actually have a retirement plan?The fact is, even if they’re saving for retirement, many people are doing it without a plan. They have no idea how much they need to save, how much they will need to live off and for how long, and what rate of return they would need to reach their retirement goals. If you’re saving without a plan, Del Boca Vista just might not be on the table. That’s why at NEST, we start with your dreams and work backward. Your strategy should be in service of your goals, and not the other way around. So, how do you find out how much money you’ll need to retire when and how you want?
The retirement plan formula
At NEST, we use financial planning software to calculate all the variables which contribute to your retirement plan. The variables are your age, how much you’re starting with, how much you can save annually, when you want to retire, how much you’ll need to live off after retirement, how ambitious your goals should be, your risk tolerance and what other life and financial goals you have. Using all of this data, we’re able to formulate a comprehensive retirement strategy. The fact is, when we first meet with a client for a financial plan, we often find that people’s current approach is either too aggressive or not aggressive enough. To better understand this, let’s break down each of the variables we consider. These variables are in no particular order of importance. Besides your age and income, each of these factors depends on the others and will have to be adjusted based on how the variables interplay. It’s a bit of a dance.
Aggressive or conservative goals
How ambitious should you be in goal setting?In the context of retirement strategy, “aggressive” and “conservative” have slightly different connotations than they do in investment management alone. In investing, we’re referring to your risk tolerance. But when it comes to retirement, in addition to looking at risk tolerance, we’re also looking at age of retirement, your retirement number, and your savings goals in terms of aggressiveness or conservativeness.
Age
The younger you get started, the more time you have to save for retirement. This means your savings can be more conservative, while your retirement age and risk tolerance can be more aggressive. Meaning you can aim to retire sooner and invest in higher risk assets.The more wizened you are when you begin, the more aggressive your savings strategy will need to be. However, your retirement age and investment strategy will likely need to be more conservative. That means retiring later and minimizing risk in investments.A note about investment risk: It can be tempting to be more aggressive with your investments if you’re in your 40s or later and trying to make up for lost time to reach your retirement goals. This can be a mistake. It’s dangerous to take greater risks in investments when you’re older, because you won’t have as much time to financially recover from the potential losses in an aggressive portfolio. This is even true for entrepreneurs and small business owners. You must consider the number of working years remaining when assessing your risk tolerance.
Age at retirement
After your age, we look at when you want to retire. If you’re in your 20s and want to retire in your 40s, we’ll need to up the aggressiveness of your plan. If you’re in your 30s and want to retire at 70, our strategy might be a little more conservative. In your financial planning session, we’ll look at different ages of retirement and figure out when would be the best for you considering all other factors.In short, your level of aggressiveness or conservativeness depends on a few things. Your level should suit your goals. This is the best way to mitigate unnecessary risk. At times, people can be too aggressive in investments, when it’s unnecessary to meet their goals. This moves out of smart financial strategy and into the realm of gambling.Let us help you find the sweet spot between risk and reward by setting realistic and attainable goals.
Your retirement plan starting point
Some clients come to us already well-established in their retirement savings. Some come to us not having started at all. When you meet with your financial advisor, it’s important to come with complete information about your retirement accounts — 401ks, IRAs, company retirement accounts, savings accounts and investment accounts. All these comprise your starting point, informing the rest of the variables in retirement planning.For example, if you’ve already got $500k saved for retirement, and you’re not planning to retire for another 30 years, your strategy is going to look a lot different than someone who has $100k and wants to retire in 20 years.
Ability to save
Another important factor in your retirement strategy is how much you can save each year. This number will have a big impact on how you benefit from compound interest, your retirement number, and even your retirement age. Sure, you can cut back on your morning latte and all those other tips for saving money you’ve heard ad nauseum. But this variable has more to do with an honest, in-depth look at your cash flow and a reprioritization of what you do with your money. The mindset of paying yourself first is a good place to start, but you need to know how much to save and where to put that money (hint: not in a savings account). Not saving enough isn’t the only issue. Saving too much can be an issue, too. Tomorrow is promised to no one. The life you lead up to retirement is also important, and our goal is not to make you deprive yourself of living now! We’re looking for the Goldilocks zone of saving. Using your starting point, your income, your other goals, and your goals’ level of aggressiveness, your financial advisor will help you find that perfect number.
Other goals
John Lennon said, “life is what happens when you’re making plans.” At NEST, we don’t think you have to choose between the two. One can prepare for the distant future and for shorter term goals. You can plan for a condo in sunny Del Boca Vista and to buy a new car next year, pay for your kids’ college, or summit Everest. In short, retirement is just one aspect of retirement planning. We also look at what you want to experience and accomplish in the years of your life leading up to retirement. In Aesop’s fable of the ant and the grasshopper, the ant is glorified, and the grasshopper scorned. But we think you can learn from both — store the grain for winter and make music along the way. Having an idea of your other goals informs the saving and timing strategy for your retirement plan. We’re aware that you won’t know up front what your other goals will be from now to retirement. That’s okay! That’s why it’s important to revisit your financial plan yearly to adjust course as needed. This way, we can ensure you’re still on track for retirement.
How much money will you need to retire?
As you can see, this answer isn’t so simple to give. There are so many factors that go into this number. It’s completely unique for each of our clients. Because of the dance between all of these variables in addition to the emotional aspect of goal-setting and money management, we always say financial planning is an art, not a science.This is a big part of why we’re dedicated to staying boutique and bespoke. Each of our clients deserves the kind of individualized planning and strategizing to suit their specific goals. No two are alike.So, if you’re ready to get strategic about your financial plan and retirement strategy, how about you schedule a no-obligation call with us? We’ve been helping people achieve their financial goals for nearly 30 years. Let us help you. Reach out to us at info@nestfinancial.net. Find us on:LinkedIn Facebook Yelp TwitterDISCLAIMER: We are legally obligated to remind you that the information and opinions shared in this article are for educational purposes only and are not financial planning or investment advice. For guidance about your unique goals, drop us a line at info@nestfinancial.net.