Am I Ready to Retire? Financial Management for Your Future
With savings, this could be you.
It's never too early to get started on financial management for your future. Great retirements require planning and long-term financial management: you need to build up money and pay down debt so that you can afford to do what you want when you're done working. Even so, "whether you're 24 or 64, you'd be amazed what you can do today to help create a better retirement for yourself," according to Brandon Small, a Minneapolis-based charted financial analyst and certified public accountant.
Building a Nest Egg
One rule of thumb for retirement is called the 4 percent rule: according to this rule, what you need to withdraw in your first year of retirement should be about 4 percent of your total retirement savings. Some experts are more comfortable with a 3 percent or even a 2 percent rule. When applying the rule, remember that experts recommend that you plan on spending about 80 to 90 percent of what you spent before you retired. For example, if you lived on $100,000 before retirement, planned to spend $80,000 after retirement and followed the 4 percent rule, you'd need to save $2,000,000. Another rule is to save eight times your pre-retirement income -- this would result in only $800,000 of savings.
"There are so many rules that it can be hard to be sure how much to save. The more you can save, though, the better off you'll be," says Small. He also gives two quick rules, "One, the younger you are, the more reasonable risk you can afford to take, and two, tax-free is better than tax-deferred is better than taxable." As you approach retirement age, consider adjusting your portfolio away from riskier investments like growth stocks or higher-risk bonds into more stable investments like real estate investment trusts, investment-grade bonds or annuities. The second rule refers to balancing long-term tax-free investments, like contributions to a Roth IRA , with tax-deferred investments like 401(k) plans and regular investing.
"There are two halves to a successful retirement - saving money so that you have it to spend, and spending less so that you don't have to tap into your savings as much," says Small. The more debt that you can pay down today, the easier it will be to retire, because your savings will stretch further. "Paying down debt is a great way to stretch your retirement savings, especially if you got a late start," he adds. Suppose you follow the 4 percent rule: for every $100 in monthly debt payments you can eliminate -- or $1,200 in annual expense -- you can retire with $30,000 less saved. As you can see, reducing your debt can have a significant effect on your retirement and the lifestyle you enjoy.
Saving money for retirement isn't the only thing that you need to do to financially prepare. You may also need to adjust your insurance. "Deciding whether or not to buy long-term care insurance is a complicated and highly personal decision," says Small, but, if you're retiring before you're eligible for Medicare, having access to health insurance is usually important for most retirees. You may also want to make some lifestyle changes, like selling your house and downsizing. Setting your legal affairs in order with an estate plan as well as financial and medical powers of attorney are all important steps you can take when you get ready to retire.
Retirement and You
"Ultimately, the advice I give clients isn't about money," explains Small. "It's about helping them use the financial resources that they have to live richer and fuller lives. Just because they have the money in place doesn't mean it's time to retire." Once you've put all of your financial ducks in a row, you don't have to retire. In many cases, the longer you wait, the better off you'll be. Retirement can be the best part of your life, or it can be a long, dull slog, where you go through day after day feeling you have nothing to do. Making sure you have a meaningful plan for the rest of your life can help make sure it's the former.