Retirement Planning, Dougie Style!

December 10, 2014

One thing I love about my colleague and friend, Doug Spencer, is his ability to make the complicated simple. Take retirement planning for example. Some people approach retirement planning as though it involves complicated math, an ability to predict the future, and an ounce of luck.

Not so, saith the Dougster. In fact, he believes it really only takes three key ingredients. Here are Doug’s three tips to securing a comfortable retirement:

Run a retirement calculator to see if you’re on track.

As simple as it sounds, most people haven’t done it—just under 65% of American workers according to our own research here at Financial Finesse—but you can run one right now by using this financial calculator: https://ffcalcs.com/retirement_estimator. It only takes about five minutes, but it could be the best five minutes you spend this week.

As a rule of thumb, most people want to shoot for replacing at least 80% of their income in retirement, but if you’re worried about medical bills and/or plan to travel a lot, you may want to shoot for 85-90%, or higher. If you are on track, that’s great! Keep up the good work. If you’re not quite there yet, play around with the numbers to see what steps you can take to get on track. That may mean saving more, retiring a few years later, or changing your investments if you are being too conservative.

Set up auto-escalation of your 401(k) contribution.

Many employers now offer a contribution rate escalator (CRE) as part of the 401(k) plan, so if your employer is one of them, take advantage of it. With the CRE feature, your 401(k) contributions automatically increase, helping you to gradually save more each year. If your income includes cost-of-living increases each year, coordinate the increase in contributions with your pay increase so that you hardly notice it.

If your plan doesn’t offer CRE, do two things: 1) ask your employer to add this feature to your current plan and 2) set an annual reminder in your calendar to bump up your contribution once a year.

Use target-date funds if your plan offers them.

In the research mentioned earlier, only 36% of employees that took a financial wellness assessment felt comfortable with their current asset allocation, and only 28% said they rebalanced their investment accounts regularly. Now they could spend time learning more about how to invest using any number of asset allocation strategies or they can take a cue from Doug and keep it simple by using a target-date fund. The target-date fund will include a mix of investments for you based on how close you are to your expected retirement date so you don’t have to choose investments or re-balance them—the fund does the work for you. If you’re a moderate investor, the target date closest to your expected retirement year makes sense. If you are more conservative, you may choose a date 5 or 10 years earlier, and if you are more aggressive, you can simply choose a target date 5 or 10 years later.

Now if your plan does not offer target-date funds, it may still allow you to set up automatic re-balancing. You will still need to choose an asset allocation (use this Risk Tolerance & Asset Allocation Worksheet and http://www.aaii.com/asset-allocation for guidance), but once you have one, set up your account to re-balance at least once a year. If your plan doesn’t offer automatic re-balancing, ask your employer to add this feature and set an annual reminder (or use the same one from above) to re-balance your investments once a year.

That’s it! You now have three simple steps for enjoying a comfortable retirement from the master of simplicity himself: Doug Spencer. Enjoy the holidays, and from Doug, me, and the entire Financial Finesse family, Merry Christmas!