Among the complexities of financial planning, the most common conversations we have with clients are in the areas of retirement planning. Goals and dreams will certainly vary, but there is typically one common theme – a desire for financial security. More specifically, many ask the question: How much monthly income will I have during retirement?
Situations will vary from person to person. That is why we never employ a cookie-cutter approach with our clients. Each plan must have an individual element to it. But the plans are guided by principles.
Consider this—a top rated professional quarterback, his team and their coaches tailor a game plan for each opponent they face. However, the plans are guided by the basics—the fundamentals.
In our case, we look to the fundamentals that span the financial planning spectrum.
As you look forward to retirement, let's touch on these various fundamentals and what you may want to consider in approaching them.
1. Am I saving enough in my retirement plan or 401k? Is there a matching provision that your company provides? If there is, don't pass up free money! We can't stress this enough, because too many employees leave cash on the company table. At a minimum, pick up the low-hanging fruit.
2. Do I have enough in stocks? It's a question that is bantered around often by financial professionals. For some who experienced the market declines of 2001 and 2008, there is a nagging fear that we will get battered again. It's a fear that keeps us too close to the financial shoreline and delays or prevents us from reaching our financial goals because we may be too conservative.
These are concerns we certainly understand and why we preach diversification within asset classes (numerous stocks across industries and countries) and diversification among asset classes (stocks/bonds, short-term cash, etc.). Diversification helps to manage risk.
Historically, stocks have outperformed income-producing securities such as bonds or CDs over the long-term. But we also recognize a portfolio that is 100% invested in stocks, even if fully diversified may be too risky for most individuals. It's one reason we'll often "anchor" a portfolio with securities that are not as volatile.
You won't squeeze every last dime out of a bull market—but most don't need to. It's better to have confidence when an inevitable decline in stocks occurs.
So we'll rephrase the question. Is it perhaps time to rebalance your portfolio? Do you have too much in stocks? Given solid gains over the last year, perhaps you're a bit too heavy in stocks. For some, it may be time to take some risk off the table and get you back within your proper parameters. In other words, the percentage of stocks that work towards your personal goals and tolerance for risk.
3. When should I take Social Security? This is a question that comes up often. You can take Social Security when you turn 62. Or, you can delay it until you reach 70.
While many factors will influence the timing, it's usually best to avoid the temptation of dipping into Social Security too early.
Let's look at a simple example Fidelity recently provided. "Colleen is 62 and will reach her full retirement age (FRA) at 66 (note: if you are born 1960 or later, FRA is 67). If she starts taking benefits at 62, she will receive $1,200 per month. If she waits until her FRA to collect, she will receive 33% more, or $1,600 a month in Social Security. If she waits until 70, her benefits will increase another 32%, to $2,112 a month."
That's about 8% compounded annually. Moreover, delaying results in your spouse receiving a higher survivor's benefit.
4. Do you have a pension? How should you take it? Many prefer the peace of mind a monthly check will provide, one that comes on top of your Social Security and savings. Or, you may choose a lump sum payment and roll it into an IRA.
But consider this—if you were to pass away before your spouse, do you know what impact it would have on your pension? Typically, a spouse will continue to receive a monthly check at a reduced rate if you elect a survivors benefit. Or, you may choose a reduced initial payout that continues at that rate if you pass first. If you are being presented with various pension options and aren't sure how to proceed, let's talk.
5. What are you going to do once you've retired? When you wake up each morning and are no longer going to work, what will you do? As enticing as it sounds to enter retirement and have work abruptly end, many retirees find the transition easier by shifting from full-time to part-time work.
When you do end up making the full transition, what will your new venture look like? Your new life won't have the structure it had before. Consider putting together an outline of activities and a daily or weekly plan.
Consider volunteer opportunities, exercise, and if you have grandchildren, time with them is always well spent.
Remember, retirement isn't necessarily a time to slow down. It's a time to refocus and redirect your path and embrace new experiences. Take charge and don't let circumstances dictate your future. It's a key factor to a happy and fruitful retirement.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.