When I talk with friends and colleagues about retirement, the term “retirement” doesn’t have the same connotation it once had. Different people, from different generations don’t have the same long term financial goals. Many 30 year olds have watched their parents work their hands to the bone in order to put together enough money for retirement, which for most consists of living out their twilight years as they choose. That lifestyle is not as appealing as it once was. Something changed. Younger generations don’t want the same life as their parents; they want to spend more time, at a younger age enjoying life. Regardless of what “retirement” means to you, in order to truly be able to live the lifestyle you desire, you’ll need financial independence to do so.
With a constantly changing economic landscape, an increase in medical expenses and a rising anticipated lifespan, the road to retirement has never been harder to navigate. When planning for retirement, the first retirement income source that comes to mind for many is Social Security. When Social Security was first implemented in 1935, the average life expectancy was 65. Compare that with the fact that today’s average 65 year-old retiree anticipates living another 20+ years.1 This means a system that was designed to originally provide a retirement income stream to some of the population, is expected to provide income to a larger percentage of the population, for a longer period of time. While tweaks have been made over the years to increase this program, the idea of retiring and living solely off my SSI is a pipe dream.
Additionally, as baby boomers are finding out, underfunded pensions, hidden investment fees on 401(k)s and a lack of financial savvy by employers have pushed the onus of saving for retirement from the business to the individual.
That being said, the sky is not falling. There are still plenty of ways to attain the retirement you desire, you just need to make a plan and stick to it. For me, nothing is set in stone, but I find that this basic principle from one of the greatest investors of our time—Warren Buffet—speaks to me: Keep It Simple Stupid.
1. Set goals and stick to them.
When people do financial planning, it’s important to plan for ALL your goals. If you’re someone who wants to go sailing around the world or someone who wants to spend a year backpacking through Europe, include those in your planning.
2. Save early and often.
This concept is one that I cannot emphasize enough. With a disciplined plan in place, the benefits of long term investing and of investing on a regular basis are the keystone to a personal retirement plan. Even a relatively small amount of money can grow exponentially over time given the power of compound interest.
Benefit from a diversified portfolio. Diversification can be beneficial due to a number of factors. Primarily, spreading one’s exposure across multiple asset classes aims to improve the overall risk-return characteristics of a portfolio. Or simply put, you can expect that for a given level of risk, a diversified portfolio should outperform an undiversified portfolio over the long term. That’s not to say that an undiversified portfolio may not outperform a diversified one, but the investor is taking on much more risk in doing so. For every janitor who became a millionaire because they were paid in stock from their dot.com employer, there’s dozens who saw the majority of their retirement evaporate because it was mostly in company stock when their company ran into financial trouble.2
4. Contribute to your employer’s retirement savings plan.
If you work for a company that offers a retirement plan, take advantage of the opportunity. If your company offers a match, you should at least contribute up to that amount. If you don’t take advantage of the match, you’re essentially leaving money on the table.
5. Traditional IRA
Similar to a 401(k), this type of account offers the benefit of tax-deferred growth. This allows you to defer the taxation of your income, and the gains on your investments, until you withdraw them in retirement. Additionally, if you meet certain income requirements, contributions to a Traditional IRA can be deducted from your income when reporting your taxes.
6. Roth IRA
Similar to a traditional IRA but nondeductible, a Roth IRA is a retirement account where you’ve already paid taxes on money going into your account (it was taxed before it was paid as income—this is called “after-tax”) and then all future withdrawals are tax-free. A Roth IRA makes the most sense if you anticipate your tax rate to be higher during retirement than your current rate.
7. Pay attention to the “hidden costs” and fees on investments.
When investing, you need to take into consideration the underlying fees associated with your investments to truly determine whether or not the anticipated benefit from the investment is worth the fees. If you’re working with an advisor, their goals should align with yours. However, you also need to be aware that the advisor needs to be compensated for their time. Some advisors charge a fee only for advice. Some offer commission-based investments, which may cost less in the long-run than fee-based investments. This is because many investment sales charges are on a sliding scale – they reduce the more you invest. Fee-based investments charge a smaller fee every year for the advice and service of managing the account, but these fees can add up over time. Do your homework, and work with an advisor you trust to determine which fee structure works best for you. Fees do matter. The average 401(k) fee is around 1%. This may not sound like much, but losing 1% of your account value over 30 years could be the difference between retiring at age 65 and age 70.
8. Life Insurance
You likely already know that life insurance provides a benefit to loved ones, or a business, or an estate, when the insured dies. However, there’s more to permanent life insurance than just a death benefit. Permanent life insurance builds cash value that allows the policy to potentially solve numerous problems. With sufficient funding, a permanent life insurance policy can potentially be used to supplement your retirement income using tax-free loans and withdrawals. How many other tax free sources of retirement income do you have now? (Hint–for most people the answer is “zero.”) Some policies even offer income riders that can guarantee the income for life.3
An Indexed Annuity, in most scenarios, protects your premiums by offering a guaranteed minimum interest and upside potential. All fixed annuities offer the ability to guarantee an income you cannot outlive. By also giving you the potential for greater interest crediting based on changes in a major market index, and minimum interest guarantees, this can make fixed indexed annuities a vital component of a balanced financial plan.
Now is a good time to review your current investment elections to ensure your money is invested in a way that most closely aligns with your savings goals. Exactly where you should invest depends largely on your risk tolerance.
1. Social Security Administration, Actuarial Life Table, retrieved 2017
2. Asset Allocation cannot eliminate the risk of fluctuating prices or uncertain returns. Diversification does not assure a profit or guarantee against loss.
3. Regarding tax-free loans and withdrawals – withdrawals up to the basis paid into the contract and loans thereafter will not create an immediate taxable event, but substantial tax ramifications could result upon contract lapse or surrender. Surrender charges may reduce the policy’s cash value in early years.
Life Insurance income riders typically have limitations and restrictions to exercising them, including but not limited to, minimum and maximum age requirements, years policy has been inforce and minimum policy values. Receipt of other policy benefits that reduce policy values may also reduce the ability to exercise the income rider. Receipt of income benefits will reduce the policy’s cash value and death benefit, may reduce or eliminate the availability of other policy and rider benefits, and may be taxable.
Riders are supplemental benefits that can be added to a life insurance policy and are not suitable unless you also have a need for life insurance. Riders are optional, may require additional premium and may not be available in all states or on all products. This is not a solicitation of any specific insurance policy.
4. Guarantees are dependent on the claims paying ability of the issuing Company.
5. Indexed annuities have surrender charges that are assessed during the early years of the contract if the annuity is surrendered. In addition, withdrawals prior to age 59 ½ may be subject to a 10% Federal Tax Penalty. Indexed annuities do not directly participate in any stock or equity investments. This is not a solicitation of any specific annuity contract.
Securities can be offered solely by representatives registered to offer such products through a broker/dealer. Bryan Pritchard is a registered representative of Equity Services, Inc.(ESI). ESI, Member FINRA/SIPC, is a Broker/Dealer affiliate of National Life Insurance Company.