The Danger of Keeping Things TOO Simple With Retirement Planning

September 14, 2017

With a lot of personal finance, it makes sense to keep things simple or otherwise choose the method that works best for you. Just as the best exercise is the one you’re actually going to do, the same is true for the best budgeting or money management system. When it comes to investing, simple strategies typically work better than more complex ones.

Finding your retirement number isn’t that simple

But while varying money management and investment systems can get you to the same place (saving enough and being properly diversified, respectively), this isn’t necessarily true when it comes to figuring out how much you need to save for retirement. For example, this article I recently read in USA Today called “Simple to complex: 4 ways to find your retirement number” seems to suggest that there are 4 valid ways of figuring out how much to save:

Save 15%
Save $1 million
Save enough to replace 80% of your income
Save enough to fund your projected retirement expense

This advice can be dangerously simple.

Why saving 15% might not be enough

For example, the 15% number is cited in a Fidelity article that uses this as a guideline for someone starting at age 25 and saving until age 67. Let’s put aside all the built-in assumptions about your income, employer match, investment returns, and income needs in retirement. Instead I’m asking how many people reading this article are actually age 25 or younger? 15% may make sense as a default contribution rate for retirement plans since many people getting their first job out of school tend to stick to the default, but it can be dangerously low for someone starting much later.

Why $1 million might not be enough

What about $1 million? Using a 4% withdrawal rate, that would produce about $40k of inflation-adjusted income each year for 30 years. For someone with higher income needs, that may not be enough. For others, it can be such an unnecessarily high bar that they feel they’ll never be able to retire and are discouraged from saving at all.

Taking it to the next level

If you’re going to take the time to calculate how much you need to save in order to reach $1 million, you might as well take just a few more minutes to use a relatively simple but far more effective retirement calculator like this one. If you don’t want to take the time to project your retirement expenses, you can use the third method in the article and simply target an 80% replacement of your current income.

That’s because people typically spend less in retirement on housing (you may have a paid-off home and/or downsize), other debts that may be paid off, children, etc. You also won’t be saving for retirement when you’re retired so you won’t need that income either. While you may need less, few people will absolutely NEED more. (If you’re planning a more lavish retirement, you can always target a higher income replacement percentage.)

Factoring in all the variables

While it takes just a few minutes to use the calculator, it will take into an account variables such as your projected Social Security, pension, and other retirement income, current age, planned retirement age, and current retirement savings balance and contribution rate for both you and your spouse if married. You can also adjust your assumed life expectancy, inflation rate, and investment returns.

By playing around with the calculator, you can see how much any of these variables can drastically affect how much you need to save to reach your goals. You may need to save a lot more or a less than 15% to have a lot more or a lot less than a $1 million in retirement. When it comes to retirement planning, keep it simple…but not TOO simple.

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Is The Financial Tail Wagging Your Retirement Dog?

August 28, 2017

When someone asks you about your retirement plans, is your first thought to check your account balance? That could be holding you back from the life you dream of living in the interim years. Remember that money is there to support your life, not the other way around.

Here are 3 steps to help ensure you’re on track for retirement without letting it rule your life:

1. Forget about the money… for now. Money might limit some of the things we can do today, but it’s still just a tool, not a master. Make sure you’re using it the right way. Since the future is unknown, start by writing down everything you imagine your retirement lifestyle would be if you didn’t have to worry about the money:

Where will you live?
Where will you play?
Will you work or volunteer?
Perhaps a little of both, or neither?
Who will join you?

Consider the things you like to do and you want to continue doing regardless of your finances.

2. Compare the cost of your ideal retirement to the cost of your lifestyle today. To compare whether your ideal lifestyle will be a reality, use an Expense Tracker to help you review expenses over the last three to six months, then place a “plus” sign next to those you think will be higher (in today’s dollars) in retirement, and a “minus” next to those that will be lower.

Will you save money by not commuting to work anymore? Or pay less state and local taxes if you move? Websites like retirementliving.com and AARP.org offer a plethora of resources to help you with these details.

Now add up those pluses and minuses. Generally, more pluses mean your retirement lifestyle will be more expensive than your current one; and more minuses means it will be less expensive.

3. Run a retirement calculator. Once you have a better idea of what your ideal retirement lifestyle will cost, calculate if you’re on track for your goal or if you need to make up for any gaps. The sooner you know where you stand, the sooner you can make necessary adjustments like saving more, working longer, or re-evaluating your retirement ideals.

4. Make saving automatic. Make full use of your 401(k), which makes saving brainless and painless. If your plan offers an auto-escalator tool, enroll in that to have your contributions increased each year without you having to worry about making the change. To supplement your 401(k), set up a direct deposit from each paycheck into a separate savings account. That way you can relax, knowing that you’re accumulating savings, while enjoying the rest of your earnings to live for today.

Your retirement really is whatever you choose to make it. Let your dreams guide your actions, and you have a great chance at turning them into a wonderful reality.

How To Protect Yourself In Case You Lose Your Pension

June 30, 2017

Over the last few months I have talked to a lot of people who are concerned that their company’s pension plan has changed for the worse, and I have a hunch the next few months will see more of the same. The state of Michigan is considering a complete overhaul to their teacher pension plan, placing the majority of the retirement savings burden on teachers, a trend I see only increasing as state and local governments face budget woes.

These are people from many different employers all across the country. Many others have seen an employer’s pension plan get frozen, terminated, or taken over by the PBGC. What was just a generation ago almost a “given” has become increasingly rare, and even when it exists there is ever increasing skepticism about the long term viability of the pension plan.

What can be done?

If you have a pension…be thankful.
Then, be prepared to see it change between now and retirement (even if you are retiring in the near term).
Most importantly, take control of your financial life & get yourself in a position where no matter what actions your employer takes regarding the pension plan, you can retire comfortably.

OK, that sounds like reasonable advice, but how do you do that?

How to take control

In order to do it yourself, here are two things that will help you prepare:

Have a plan! Aka, think big picture.

Understand when you want to retire, how much you’ll spend, how much income you will have, and the financial resources available to you. (Get help from a financial planner if needed)
Run a retirement calculator to get a sense of where you are tracking toward your long term goals. Determine how much you need to save between now & then.

Dig in to the details. This only takes a few minutes, so don’t be intimidated. But do make the time.

Understand your current budget and where your money goes. Where can you save more? Where can you spend less?
Make sure your investment dollars are invested for optimal growth without too much risk. Do you have the right mix of stocks, bonds, cash and other assets?

When you have a fairly clear vision for your future, you can take actions that will help you reach your goals without feeling like you’re leaving your employer in control. Start with your big picture, dig into the details, and take control of your financial life. If your company pension goes away, gets frozen, gets taken over by the PBGC, or just never existed in the first place – it won’t matter because you will have prepared yourself for the future with or without your pension.

Retirement Planning Step 4: Monitor and Adjust

May 24, 2017

This is the fourth and final step in my retirement planning step series. Now that you’ve set your goal, opened your account and selected your investment plan, you should be checking your progress about once a year, unless you have a significant change that affects your plans like a job loss, divorce or inheritance, in which case you’ll want to update your retirement estimator then as well. Any time you’re considering making a change to your savings, the first step should be to calculate how that will affect your retirement plans.

If you need to pull back on saving to pay for college, you need to know how many more years you’ll have to work to compensate. Thinking about using your retirement savings to purchase your first home? Double check to make sure that won’t set you back too far with your savings goal.

And what if you run that calculator and find that you’re overshooting your goal? Awesome! This just means you’re on track to reach financial independence sooner, which will give you more choices with your retirement lifestyle. Unless you’re five years or less from retiring, don’t use that as an excuse to save less – better to be over-prepared in case life happens than to be playing catch-up when it does happen.

Finally, make sure you’re rebalancing your investments at least once a year. If you’re using a Target Date Fund, then you’re all set, but if you created a custom mix then you’ll want to double check that it doesn’t get too far off base as the market changes. Your 401(k) plan may offer an auto-rebalancer that will do that for you as well, so just check the box and keep saving.

Can You Save Too Much For Retirement?

May 09, 2016

Is it possible to save too much for retirement? Isn’t that a bit like eating too many green vegetables? Recently, I read an article by journalist Constance Brinkley-Badgett, Are You Actually Putting Too Much Money Away for Retirement?, challenging the common financial planning guideline of using a generic “replacement rate” for retirement savings. Brinkley-Badgett quoted David Blanchett, CFA, CFP®, of Morningstar regarding his research into retirement income replacement rates. Do people really not need to save as much for retirement as they think they do?

The simplicity of this message worries me – a lot. According to a study by the Federal Reserve, 31% of American households don’t have any retirement savings at all…not one dime. Even if it’s true that some higher net worth households are “over-saving,” the far more urgent national problem is that most Americans are not saving enough.

There are two common, interrelated retirement planning guidelines. The first is that you should target replacing 70-80% of your pre-retirement income. Why 70-80% and not 100%? Primarily because you no longer have to save for retirement or contribute to Social Security.

However, Blanchett asserts that 80% may be inaccurate, and that based on his research the replacement rate range is a wide 54-87%. “The true cost of retirement is highly personalized based on each household’s unique facts and circumstances,” he wrote in the report summary, “and is likely to be lower than amounts determined using more traditional models.” It’s a thought-provoking piece of research, and if you are interested in financial planning, it’s worth a read.

Another general guideline is known as the 4% rule for retirement account withdrawals. Based on a 1994 article by William Bengen, CFP® in the Journal of Financial Planning, the idea is if you withdraw no more than 4% from your retirement accounts the first year of retirement, then adjust your withdrawals in subsequent years for inflation, a portfolio of 50% stocks and 50% intermediate Treasury notes should last at least thirty years. The two work in conjunction: save as much as you need to generate an annual 4% inflation-adjusted withdrawal from principal over thirty years to cover 70-80% of your pre-retirement income.

While it is true that the 80% and 4% rules are “one size fits all” generalizations that can be improved by personalizing them based upon your health, your expected monthly expenses, your total savings and your expectations for activities in retirement as Blanchett correctly notes, not everyone can afford to have a personalized retirement plan made for them. What does this mean for someone who’s saving for retirement in their 401(k) plan and does not have access to the ongoing services of a financial planner? It is tempting to listen to the “save less” recommendation. After all, if you save less for retirement, you’ll have more money to enjoy life now. However, when we consider the basis for the 80% and 4% rules, we can see how even if your personalized replacement rate was 50 to 60%, you might still want to save for the 80% replacement rate (or higher).

A 95% success rate still means running out of money 5% of the time.

These rules were developed based upon studying how people could spend money in retirement in such a way that they can feel a level of confidence that they will not “outlive their money.” If one followed the 4% withdrawal rule, then you would have about a 95% chance of being able to live on your savings for 30 years. 95% confident sounds like a lot, but is it enough?

To see what this means, consider what would happen if you lived the same retirement over and over again thousands of times. In some of those lives, you’d get lucky and retire in a bull market, where stocks rise significantly, so your portfolio would always be enough. In others, you’d retire and the markets would fall 30% in the first year. The bottom line: during 5 out of every hundred lives you would run out of money before your thirty year retirement is up.

Past performance does not indicate future results

The model in Bengen’s original paper used long term historical rates of returns and inflation. However, the future may be different. While that could work out in your favor, with higher rates of return during retirement and lower than expected inflation leading to your savings lasting longer than predicted, the opposite could also be true. Rates of return could be much lower, and/or inflation could be higher, which means your money could run out sooner. You could also have the bad luck of retiring at the beginning of a bear market, with a few years of successive negative returns leaving you with a smaller portfolio to generate retirement income.

You could live much longer

According to the Social Security Administration, “a man reaching age 65 today can expect to live, on average, until age 84.3. A woman turning age 65 today can expect to live, on average, until age 86.6. And those are just averages. About one out of every four 65-year-olds today will live past age 90, and one out of 10 will live past age 95.”

Even if your needed retirement replacement ratio were lower, perhaps because you paid off your mortgage or otherwise had significantly lower expenses, there is still a chance that you’ll outlive your savings. What if your money has to last you 40 or 50 years? One way to address that is to save more before retirement, but not spend more afterwards, so you have something left in your nineties. Aim for a 99% confidence level that you won’t outlive your money over a long retirement period.

When you consider that poverty is the price for outliving your money, you can see why financial planners generally want you to oversave for retirement. I don’t know about you, but I plan to live longer than 30 years. Since I can’t change what happens in the economy, I’m planning to save more – not less — than the 80% and 4% rules tell me.

How about you? What do you think are the ideal rules for saving and spending in retirement? Email me at [email protected] or follow me on Twitter at @cynthiameyer_FF

Retirement Planning Shouldn’t Be Like Counting Jelly Beans

May 06, 2016

When I was growing up, there was a local store that would “give away” a huge stuffed animal to a person who could guess the exact number of jelly beans in a gigantic jar. I think that stuffed animal was still in the store when my kids were about the age I was when I first saw it. There may not be a right answer to that question. After all, did someone spend most of a day painstakingly counting jelly bean after jelly bean and keeping a running tally? Is the number that the store owner believes is correct an actually correct number?

After this long, I’m sure some of the jelly beans have merged together and that might change the correct number anyway. I don’t know if people have actually won the stuffed animal and there are lookalikes that keep getting placed where the old one was…or if it’s one constant big bear sitting there taunting everyone who guesses at the number of jelly beans. But it is certainly a source of entertainment and mystery for kids and for that, I’m thankful that it’s there.

Entertainment and mystery…that’s how many of the people I talk to view their financial lives. They see the “game” of planning for retirement a lot like the jar of jelly beans. “How many are in the jar?” Who knows? “How many will it hold?”

“How much money will I need to live the rest of my life?” “When should I take Social Security?” “How much should I contribute to my 401(k)?” “What will taxes look like in my retirement period?”

These questions aren’t that much different from the jelly bean question, but they certainly are a LOT more important in the grander scheme of life. The good news is that with some thought, some preparation and some planning, you’ll be able to get much closer to the “right answer” with your retirement questions than I ever got with the jar. I am a big fan of simplicity, so when I meet someone who is completely baffled by the concept of retirement planning, I go through a quick retirement reality check with them. It’s a two stage process and I’ll share it here:

Step 1: We use this Retirement Estimator calculator to see if their current course of action will get them close to reaching their goals. If they are on track, we check in annually to make sure they’re staying on track and to see if anything new has developed. If they aren’t on track, we tweak some things to see what it would take.

What happens if they increase their 401(k) savings rate? What if they work a few more years? What if they change their investment strategy and shoot for more growth?

During this step, we make sure they have current statements from any and all investment accounts, including their 401(k). We also talk about and enter any income streams like Social Security, pensions, rental income, etc. It’s a pretty straight forward calculator and we can usually build it in less than 15 minutes as we talk through the inputs.

Step 2: This is my “real world” sanity check of the numbers from the calculator. We look at their take-home pay based on their last few paychecks and figure out a monthly amount that they’re living on today. We can even shrink that number if they are regularly saving money, because those funds aren’t being spent now. We add back about $1,000 for medical coverage and some inflation, since that’s usually being deducted from net pay today.

Then we look at Social Security and pension income and come up with a gap that would be needed from investments. If it’s $1,000/month, I like to annualize that and call it $12,000 per year. Divide 12,000 by 3% (a fairly low withdrawal rate from a portfolio) to get to the amount of money they’d need in their investment accounts ($400,000 in this case – in today’s dollars). This is far from an exact way to calculate retirement needs, but it can help validate the results of the calculator. And, it’s a very easy and understandable way to see what retirement might look like.

Once people know the results, that’s when the real work begins. Sadly, not nearly enough people have ever run a retirement calculator. According to our 2015 Year In Review research, only 22% of the population knows that they are on track to replace 80% of their current income in retirement. That means there is a lot of work to do! Most people have never even run a retirement calculation.

Doing this quick two-step process puts you ahead of the game because at least you know where you stand. Only then can you knowingly make progress. Use the calculator – today! And use my way-too-simple sanity checker as a backup. If you do those two things, you’ll move from hoping you can retire at some point to knowing what it will take to retire when you choose and you’ll end up with a lot more than a stuffed animal.

Are You On the ‘If I’m Lucky’ Retirement Plan?

March 16, 2016

The other day, a friend asked me if contributing 18% of her salary into her 401(k) was enough to be saving for retirement. Instead of giving a simple yes or no answer as was expected, I had to answer with a question of my own, “Are you on track to retire?” Finding the answer to that question can seem complicated, but it doesn’t have to be. And unless you actually know whether or not you’re on track, it’s tough to make other financial decisions that may compete for your dollars. Continue reading “Are You On the ‘If I’m Lucky’ Retirement Plan?”

Two Calculations That May Surprise You

March 11, 2016

As the political season continues to drag on and presidential candidates drop out, we are inevitably going to be faced with a decision that makes many of us say “THIS is the best we can do from a pool of 300 million people?” Yet, the day will be upon us shortly and we will make a choice. One of the things that I found interesting and a little bit fun was this political quiz that calculates how much you agree with the different presidential candidates on certain policy questions. The answers surprised me a little bit (and I’m not going to share how the quiz came out for me) and I’ve shared it with some friends to see where they landed. Continue reading “Two Calculations That May Surprise You”

How To Become A Millionaire In Just 15 Minutes

January 19, 2016

You can’t help but talk about the lottery with a jackpot sitting at about $1.5 billion dollars. One of my colleagues, Teig Stanley, was talking to me about a recent conversation he had with our colleague, Doug. Here is what he said: Continue reading “How To Become A Millionaire In Just 15 Minutes”

One Of The Most Important Financial Steps You Can Take

December 04, 2015

During our preparation of Thanksgiving dinner, my kids and I had a conversation about our family. There have been a lot of changes in the family over the last year or so. There have been several deaths, several births, several weddings and a few events that I’m probably forgetting as I write this. Continue reading “One Of The Most Important Financial Steps You Can Take”

Is the Retirement Savings Gap Closing?

May 04, 2015

Good news! More people are expressing confidence in their ability to meet their income goals during retirement. According to the Employee Benefit Research Institute’s (EBRI) Retirement Confidence Survey, 28 percent of people with a retirement plan are very confident they will be able to retire comfortably. Continue reading “Is the Retirement Savings Gap Closing?”

Should You Sacrifice Retirement to Pay For College Expenses?

April 27, 2015

Should you focus your financial plans on funding your children’s college education out-of-pocket or through parent loans? This is a question on the minds of many parents that I speak with on a regular basis (and also a question that I personally have to deal with having a third grader and a kindergartener growing up too fast). The retirement vs. education question gets even more challenging when children reach high school and the time horizon to save gets shorter. Continue reading “Should You Sacrifice Retirement to Pay For College Expenses?”

Finding Balance

March 20, 2015

I met with a young woman recently who had a few options in front of her and we talked through the choices in front of her.She had just graduated from business school and accepted an offer with her current employer. She is in a two year long leadership development program, and during that program, the company is paying for her living expenses. They do that so that she could maintain her home back in her hometown since that’s where she will eventually live again. This woman had just gotten married and her husband moved to the new city with her and he will look for a job there since he just finished school as well. Continue reading “Finding Balance”

Those Were the Days

June 17, 2014

1979 – Happy Days was a popular TV show, disco clothes were in, and a top tune was Y.M.C.A. by the Village People. My husband recently relived all these memories at his 35^th high school reunion for the Class of ’79. I got dragged along, but at least the classic rock and disco tunes were fun to listen to. Continue reading “Those Were the Days”

How Much Income Will You Really Need During Retirement?

May 19, 2014

We hear a lot in the financial media about the looming retirement crisis in our country and in general, retirement confidence is lacking. Therefore, it comes with no surprise that one of the most frequently asked questions that financial planners receive is “am I on track for retirement?” This is commonly accompanied by this question: How much do I need to save for retirement? Continue reading “How Much Income Will You Really Need During Retirement?”

What’s Your Magic Number?

May 16, 2014

By “magic number,” I mean how much money will you need in order to retire comfortably? Without giving away too much, let me answer briefly. A WHOLE LOT!!!! Of course, it’s going to be a different number for each of us and there are countless ways to arrive at a number that makes sense for your life so my goal here is to try to help you figure out a reasonable estimate of what you might need without having to run numbers on a spreadsheet or a website that may or may not be worth the time it takes to prepare the estimate. I’m not saying it’s going to be super-easy but at least it won’t require much math! Continue reading “What’s Your Magic Number?”

Retiring Within the Next 10 Years? 10 Things to Do Now

March 03, 2014

This past weekend, I enjoyed a wonderful visit from my mom. As I was enjoying a morning cup of coffee (and not adequately caffeinated for a serious discussion), she told me about her retirement plans. Actually, she mainly shared how she was financially prepared to leave the workforce within the next year but not quite sure she was ready for full retirement. Continue reading “Retiring Within the Next 10 Years? 10 Things to Do Now”

Retirement Saving Benchmarks for All Ages

February 03, 2014

How did your team do in the Super Bowl? If you are a Seattle Seahawks fan (or at least pretended to be last night) the final scoreboard doesn’t tell a lie and your team was victorious in Super Bowl XLVIII (that’s 48 if you’re a bit rusty on the understanding of Roman numerals). Continue reading “Retirement Saving Benchmarks for All Ages”

How to Avoid a 50% Mistake

December 18, 2013

Every year, the Ward family gathers around the table to share a traditional Thanksgiving meal together. Each of us takes turns sharing what we are thankful for and before long, the whole dining room is alive with laughter and joyous conversation. After the kids are excused, the adults sit closer together to talk about more serious issues, and inevitably the subject of money enters the discourse. Fortunately, there is a financial planner among them, so everyone knows who to ask when financial questions arise. Continue reading “How to Avoid a 50% Mistake”