What is retirement planning?

A simple definition is: The setting aside of enough money during one’s income earning years to provide an income during retirement.

Seems simple enough, doesn’t it?

In years gone by it was possible for the money set aside in this manner and supplemented by Government assistance such as the Canada Pension Plan and Old Age Security, to provide for a comfortable and dignified retirement lifestyle.

Canadians have a Registered Education Savings Plan (RESP) for their child’s higher education; however, I believe we also need a Retirement Education Savings Plan, for everyone else.

Neither age nor income level should prevent us from taking an active and proactive interest in our retirement planning.

We have been alerted to the possibility that those of us newly retired or soon to retire will not be able to count on the Government support that our parents did.

We are on our own!

If we are to achieve and maintain a financially secure retirement we must become knowledgeable, informed and involved in creating the income that will support our retirement financial needs.

Fortunately, technology has made it increasingly easy for anyone with the desire and initiative to get as much information as is needed to begin to take an active role in their own financial planning and welfare.

Because we are living such longer and more active lives many of us will need almost as much income as we needed before we retired.

Then too, health issues can place a bigger financial strain on our retirement income.

So, if we do not want to live a limiting and financially restricted lifestyle when we retire, we must take steps today that will ensure we have the financial means to enjoy a secure retirement.

So, how will you handle retirement?

Burying your head in the sand is not an effective plan. If you plan to retire, you can and should learn about the many effective and efficient financial strategies and vehicles that will ensure that your “golden” years really are “golden”.

There are those in the financial industry who present a doom and gloom attitude about what they perceive will be the lack of sufficient retirement funds for a majority of future retirees.

I do not agree with this outcome as a foregone conclusion.

Achieving your retirement financial goals means understanding what you have today and how to use it to effectively plan for and create the security you will need in the future!

“Time waits for no man” Ancient Proverb

That ancient quote is a great reminder how important it is to start planning for your retirement. Whether we choose to acknowledge it or not, retirement is creeping up on us. Even for those who have just started their career, retirement planning is essential to providing a secure future for themselves and their loved ones. But that doesn’t mean we’re defenseless against time. In fact, with the proper planning, life after work can be the most rewarding years of your life.

One of the most basic ways to begin planning for retirement is determining your post-work income. Post-work income is the amount of money you’ll need to live comfortably at current income levels, after you’ve retired. That means having enough money to live comfortably without worrying about running out. It also means making sure you have enough extra to do the things you’ve always wanted to, like travel, or just plain relax!

Meeting with a financial professional and determining your post-work income is fairly painless. But not many Americans have done it. According to the 2005 Retirement Confidence Survey (RCS), released annually by the Employee Benefits Research Institute, less than half have tried to calculate needed savings for their golden years. In fact, only 4 in 10 workers say they have tried to calculate how much they need to accumulate for retirement.

So here’s a quick rundown of determining what you’ll need to save for retirement. Your post-retirement income heavily depends on the age you wish to retire and how much money per-year you wish to spend. Generally, you want to have between 75% and 95% of your pre-retirement income available to you, per year. This way, you won’t be forced to deal with a drastic drop-off in the way you live. Many people grow accustomed to living on a certain income, and it’s important to stay consistent after retirement. People are living longer too, so you’ll also want to take that into account, along with inflation. In general, it’s been said that in order to preserve your retirement assets, you’ll want to take out 6% or less of them per year.

Here’s a quick and easy example of how to determine what you’ll need to save to be in the ballpark: Say you retire at age 65 and decide you’ll need 30 years of dependable income, at an average of $55,000 a year (assuming you can live comfortably on that amount). That means, you’ll need to save approximately $1,650,000 to make sure you have enough to retire. And that’s without taking inflation, medical costs, travel, and any other unexpected expenses into consideration.

Getting a rough idea of a number is a good way to light a fire under your retirement plan. Often people believe they are saving enough, when the reality is, they’ll fall short of what is needed. By determining a rough estimate, you can then work with a financial professional to nail down an exact number. The sooner you get started saving, the easier it is on your future.

Of those 4 in 10 who have calculated, one-third has done so with the help of a financial professional. Unfortunately, a whopping 10 percent say they simply guessed how much they will need in retirement! While something can be said for “doing it yourself,” or if you choose, just guessing (we don’t recommend that!) most post-retirement income estimates need to be tested for real-world accuracy by financial professionals.

For instance, you may come up with a number that seems sufficient, but with the help of an expert, your number can be put through a series of scenarios to see if it holds up under certain real-world situations. By running it through a series of tests, professionals can determine what possible risks and warning signs may come up. Say, for instance, if you or a spouse were put in a long-term care facility at some point during retirement, your advisor can look at your determined number and see if it will hold up under the strain.

By determining the exact amount of post-retirement income you’ll need, you’ve taken the first step towards saving for your retirement. Once you get that out of the way, you’ve begun down the path of securing your future. Asking for help can be crucial, because a professional can tell you if your number will hold up in case of emergencies or other unexpected events. Meeting with a professional and determining how much you need to save is the first step towards determining future goals for retirement. It will wake you up to the real number you need to reach. Best of all, it’s painless, and you’ll be glad you did it.

Your retirement income investment plan starts now, right now, no matter how old or well heeled you happen to be.
Step One is to understand what a retirement plan is, and to identify the three large numbers you need to keep track of while you are developing your stash. With these three totals on your spreadsheet, it’s much easier to develop long-range retirement income goals that make personal sense. A retirement plan is an income production plan. Guaranteed retirement income – projected expenses = the gap. No gap, add parents and children to the expense number. There’s always a gap.
Employer provided pension plans, Social Security, and (always much too expensive) fixed annuity contracts, are retirement income providers. They are monthly income machines that you have paid dearly for but which may not be adequate to cover your retirement expenses— most of us will need more income than our guaranteed benefits will provide.
And we need to develop these additional income sources while we are still earning some kind of income. The retirement plan is the investment process you employ to eliminate the gap between your projected guaranteed income and a conservative estimate of your retirement expenses. The sooner and smarter you invest before retirement, the easier the transition from full employment to full vacation will be. Smart investing involves separating your security selections by purpose, and monitoring their performance in the same way. You’re never to young to start developing the income side of the portfolio.
Once you start to draw income at retirement, it is much more difficult to invest effectively and unemotionally. Since your income will need to remain secure and constant through several economic, market, and IRE (interest rate expectation) cycles, you really need to develop appropriate portfolio market value expectations if your program is to survive. You cannot afford to take your eye off the income ball, because income is the only thing you can spend without depleting the productive value of the assets in your investment portfolio.
Obvious? Yes, but only until the market value of your portfolio begins to shrink as a result of economic, market, and IRE cycles. If you invest properly, it (the income) should continue to grow in spite of changing market conditions and fluctuating market value numbers. You must learn to expect market value fluctuations and take advantage of them— assuming, of course, that you are following appropriate quality, diversification and income generation standards.
Retirement income planning became more difficult for most of us around the time corporate America realized that defined benefit pension plans were far too expensive to manage and maintain. At around the same time, the Social Security trust fund somehow disappeared (Did it ever exist at all?), and more and more of our hard earned was needed to support our aging friends and relatives. Why haven’t the myriad of defined contribution programs been able to fill the retirement income gap?
Because millions of totally investment-inexperienced people were given discretion over billions of investment dollars that could be tax detoured out of their paychecks and into IRAs, 401ks, 403bs, Thrift, Savings, Thrift/Savings Plans, etc. Self directed investment programs generated a need for an investment media; the investment media fueled the speculative juices of an emotional and naive mass of newbie investor/speculators; Wall Street created tens of thousands of new products and compound income schemes to sponge up the wayward dollars.
The Masters of the Universe were ROTFLOL while the Investment gods gaped in disbelief.
Defined Contribution plans are just not retirement plans— even if your employee benefits department, the media, Wall Street, and Uncle assure you that they are. Most plans are difficult to self-manage with a retirement income objective. Still, these benefit plans are necessary and quite capable of taking you close to where you want to be. Their only drawback is the false sense of wealth and retirement security that they promote. Either the money has to be converted into an income portfolio— a costly and time-consuming process— or far too many mutual fund shares have to be sold to produce the spending money
Most people think of savings and investment programs as retirement plans, and rationalize away the need for additional, outside development of an income investment portfolio. This is because all of the information they receive speaks to market value growth instead of to income. It’s very likely that less than half the money will ever be yours to spend! What, you say— why? Here’s an example. A NYC resident with a $3 million IRA retires with the expectation of maintaining her life style. Even invested for income alone, $15,000 per month is easy to generate. But how much more has to be disbursed to satisfy three levels of tax collection?
Next example. The same portfolio in equity mutual funds during a correction— now you’re dipping into principal!
Even though defined-contribution plans are excellent mechanisms for growing an investment portfolio with your hard earned, pre-tax, dollars, most plans and most plan participants worship the market value god to the exclusion of all others. Most people are too greedy and/or tax-averse to convert them into income producers during rallies— when they can lock in a meaningful cash flow. Additionally, the counter productive IRC encourages our use of owned assets first— a universally ignored phenomenon.
The “buy and hold” mutual fund mentality doesn’t transition well from growth to income— regardless of the fund category or description; the idea of helping people into a comfortable retirement hasn’t stopped the tax collectors; the market cycle is just as likely to be down as up when your gold watch is presented. You have to do more, and less, to secure that comfortable retirement.
Step One of the retirement plan is developing a focus on income, and understanding that spending money and market value are not blood relatives. Step Two is developing the right combination of tax deferred and tax-exempt income— among other things.