By Thomas Wood, Director, Financial Planning
From Inside Personal Finance
“I wish we had come to see you 10 years ago!” That’s a line we often hear from clients who are new to our financial planning practice. Clearly, lots of folks who are approaching their golden years are finding that they will be unable to maintain their standard of living once they retire. These people may have started saving too late; not saved enough; made bad investment choices; run into unexpected adversity; or, more probably, experienced a combination of all of the above.
If you (or anyone you know) find yourself in such a situation, here are a few strategies that, if taken seriously, might help you attain the retirement lifestyle you’re looking to achieve:
Save like crazy: It may seem a little obvious, but the most basic way to get back on track is to start saving -- and do so much more significantly during the remainder of your working years than you have in the past. Many of you in your 50s and 60s are in your peak earning years. And the kids are grown, boosting the amount of your discretionary dollars available each month. Rather than succumbing to the temptation to engage in an empty-nester spending spree, apply the discipline necessary for some very meaningful saving. (And don’t assume that maxing out your 401(k) at $20,500 is enough -- because it’s not!)
Make saving automatic: One of the great features of a 401(k) is that your monthly saving happens automatically -- no check to write or temptations to get in the way. This helps investment values accumulate in an amazing way. Use this same magic of automatic savings to create a systematic monthly savings plan that transfers a specified amount of money from your checking to your investment account automatically each and every month. You can establish this program for free -- just talk to your financial advisor about how to set that up.
Plan to work longer: Nobody wants to hear this, but it’s a fact that the number of years you work can make a big difference in your ability to properly fund retirement. Consider the fact that for each extra year you work, that’s a year in which you don’t have to withdraw from your portfolio to provide for your living expenses. And it’s an extra year of saving into and growing your retirement fund -- a double benefit for sure.
Work part-time in retirement: In many career fields, employers will allow employees who have valuable years of experience, company knowledge, and contacts to convert to a part-time schedule and, often, work from a remote (retirement) location. This not only provides important income to pay a substantial portion of your living expenses (and thereby letting your retirement accounts grow for a longer time), but it can also provide you with enough leisure time that you won’t mind the few days that you do actually work.
Move somewhere with a lower cost of living: When choosing a retirement destination, remember that your typical retirement income sources (Social Security, pensions, investments, etc.) don’t care where you live -- but your expenses sure do! If your income is the same no matter where you choose to live in retirement, then stretch those retirement dollars by opting for a less expensive alternative. (Note that certain states are tax-friendlier than others, so pay attention to this fact when you’re selecting a place to retire.)
Downsize your real estate: What we’re really talking about here is making a less expensive (note that I didn’t say less desirable!) choice of residence when you retire, so you can pull equity out of your existing home to supplement your investment assets and thus provide you with greater investment income in your retirement years. A different location or “right-sizing” to accommodate a smaller family size can make a huge difference in the cost of your next home. Remember that, under current tax law, as long as you’ve lived in your home for two of the last five years, the IRS exempts the first $250,000 of gain per person when you sell your home. Therefore, for a married couple, up to $500,000 of built-up equity can “transfer” from your current home into your investment portfolio tax-free!
Keep a big, long mortgage in retirement: You know that we are big fans of big, long-term, fixed-rate mortgages -- even for retirees. Advantages include enhanced portfolio wealth creation, tax leverage, and greater liquidity. These all make a strong case for having a mortgage to help you optimize your retirement experience.
Make sure your investments are properly managed: You don’t know what you don’t know, as the saying goes, and many people don’t know how to properly manage an investment portfolio on their own. There is great risk in being either too aggressive or too conservative with your investments, or in not being properly diversified or allocated, and wrong moves can be very costly. Do yourself a favor and make sure that a qualified professional is overseeing the “engine” that will be financially powering your retirement.
In summary, the people who find themselves in need of this kind of advice late in the retirement game typically didn’t plan to fail, they just failed to plan. So if you don’t have a talented financial advisor already, seek one out now to help you create a road map for a brighter tomorrow.