Much of the confusion of retirement planning has to do with people not understanding that it's more than simply saving. Good planning involves actionable steps to visualize getting from now to the desired tomorrow. Here are six ways to make that idea a specific, detailed plan towards a retirement date you can live with:
Step #1: Set Reasonable Income Goals
We would all love to be millionaires in our retirement, but that’s not reality. A practical, doable retirement plan starts with identifying what one really wants as a livable, enjoyable income in retirement. For some that might be $50,000 a year. For others, it might be $300,000 a year. Whatever the number, spend some time pegging the true cost and spelling out why it should be that number. How you get to the number then defines your retirement date.
Step #2: Determine Where Your Income Will Come From
Most of us assume our work will be enough and whatever is taken out of our paychecks will pay for our later years. For a few with a defined pension plan, that might still be the case. But for the rest of us, the exact income sources will matter. If more is needed when retired anticipate then that it will be a mix of retirement savings, Social Security benefits, and potentially still working more. The worst surprise reaching retirement is realizing you don’t have enough and then having to go back to work.
Step #3: Evaluate the Necessary Real Savings
This is where time comes into play. Based on your target goal of income per year, saving early in your life adds more funds for later.
The graphic above from Michael Kitces provides an excellent overview of the hierachy of tax-preferenced savings vehicles for high-income earners. (*Amounts are from 2018)
Step #4: Take a Look at Your Health
If your family history is one with a lot of 100-year-olds, there’s a good chance you’re going to genetically do the same. So your savings plan needs to anticipate you will need more retirement for a longer time window. If, on the other hand, you’re closer to the average mortality rates, take that into account too. No one knows for sure how long they have, but with modern medicine people overall are living much longer, well into their 80's. Your retirement has to account for this fact if you want to live comfortably.
Step #5: Consider Health Insurance Coverage
Many folks peg an age number to retirement and hope everything falls into place. But practical issues often get in the way. The most common is health insurance coverage. Employees who retire before they are eligible for Medicare coverage (a required health insurance for seniors from the government) find they are suddenly strapped for medical costs. Then they have to un-retire to afford medical help needed. If you can’t afford good health insurance in early retirement, don’t retire early, period. The easiest health insurance to have and retain is the employer-provided package while still employed. Then, at age 65 you can get Medicare. So don't retire too early or you’re on your own.
Step #6: Starting Late Is Better Than Not Starting at All
Believe it or not, starting late for retirement is still a good idea versus no planning at all. Social Security definitely will not be enough, so don’t ever assume it will be your safety net without any planning. It doesn’t work like a hospital emergency room. Starting in your 50s, you will have a higher climb and have to save more aggressively, but you gain advantages. After 50 you can put more in tax-deferred or tax shelter IRA accounts, protecting more for retirement. You will likely have more discretionary income as your major bills will stop, such as mortgage, the kids’ college tuition, loans, etc. Use those funds to save more as well. Also, try downsizing your life. Just avoiding buying gourmet coffee every morning can produce $868 annually ($4 x 217 working day stops at Starbucks). Packing a bag lunch can save $1,953 every year instead of eating out ($9 x 217 fast food lunches). These changes are simple, easy to make and hardly make a dent in our lives overall.