Planning for Retirement – Smart Choices Part 1

I once read an article that said you should start planning for retirement as early as your twenties.  I don’t know about you, but I wasn’t lucky enough to start that early.  I left college with quite a bit of student loan debt, and my big financial goal was to buy my first home.  Now, I did start putting $50 per month into a Roth IRA when I was 25, but I wasn’t really making a plan for retirement at that time.  I would bet most people in their 20s were not thinking about it either.  Realistically, people start getting serious about retirement when they tip over the point of half their working years.  For the most part, this is around age 40.

In this four-part series, I’m going to address issues you’ll face in retirement and how to get your financial house in order.  What does your retirement look like?  What does it look like from your spouse or partner’s perspective – it could be different!  How will you handle health and long-term care expenses?  What are the risks to your retirement?

The first step I’ll discuss in planning for retirement is getting a detailed picture of your current financial position.

This process begins with an exercise that might seem really silly to some people, but exhausting to others.  Yes, you really do need to know what your expenses look like.  It’s time to get your financial house in order.  Yes, lots of expenses will change between ages 40 and 60, but you’ll never know what is possible if you don’t know where you are now.  In my years of talking with clients, I’ve seen people all across the board on knowledge of what they are spending.  The spectrum goes from no idea of monthly expenses to people that know down to the penny what they spend each month.  You don’t have to be that precise.  A close estimate is ideal.

Here’s an example of what I see:  I talk with a new client who tells me she is spending about $2,000 per month.  In this day, it’s possible, but not very realistic, that $2,000 per month is going to cover household expenses.  I’m always suspect when a number this low comes up.  So, I ask the new client create a spending plan.  Just go back and review your bank and credit card statements for the past three months and average out the monthly expenses.  If there are annual expenses, divide those by twelve and add to the average monthly figure.  About 90% of the time, the number comes back at least $1000-2,000 per month higher, sometimes even more than that.  It’s really hard to know how much you are spending if you don’t review it.

There’s a big reason this number is so important for your future.  Studies show that preretirement spending levels generally carry over into the retirement.  You might wonder how this could be possible because most people think their expenses will drop significantly.  Well, your mortgage may be paid off, but then healthcare and dental expenses fill in that monthly amount.  During your working years, you didn’t travel much because you didn’t have the opportunity.  Now that you have more free time, you might spend that money you thought you were saving on traveling, socializing, or picking up a new hobby.

Part of the first step is knowing what you have in terms of insurance.  First, gather together all of your insurance policies and create a summary.  This summary should include life, health, home, auto, disability, and any other insurance you may have in place.  Include key details about each policy, such as coverage limits, death benefits, and expiration date.  How does insurance affect retirement planning?  Insurance is a risk management tool.  For example, if you didn’t have health insurance and were diagnosed with a life-threatening disease, that could completely derail you and your spouse or partner’s retirement plan.

The final piece of your detailed picture of your finances concerns investments.  Gather all investment statements and create a one-page summary of your accounts.  The summary should include current balances and the type of account – taxable, Traditional IRA, Roth IRA, or annuity.  Investments are the cornerstone of your retirement plan.

Smart Choice #1

  • Review your expenses and create a realistic spending plan.
  • Gather all current insurance policies and create a quick one-page summary.
  • Pull together all investment statements and summarize balances and account type.

At this point, you pretty much have all the information in place to seek out a financial planner.  What can they do?  In our practice, we create a comprehensive financial plan for our clients that includes a discussion of retirement, investments, insurance, and estate planning.  By completing projections for you, we can help you determine if you are on the right path.  Are you saving enough?  Are your investments going to do their job and provide you with the income you need during retirement?  Does it look like you might need to adjust your living expenses to have a successful retirement?  We can help you answer all these questions.

-Jennifer Adams

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Any opinions are those of Jennifer Adams and not necessarily those of RJFS or Raymond James. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. The cost and availability of Long Term Care insurance depend on factors such as age, health, and the type and amount of insurance purchased. As with most financial decisions, there are expenses associated with the purchase of Long Term Care insurance. Guarantees are based on the claims paying ability of the insurance company.