Most of us find it easier to earn and spend money than to save it. Planning and saving for retirement too often take a back seat to other priorities. Why is procrastination the rule, rather than the exception when it comes to retirement planning? I've heard many reasons from my clients: thinking about retirement makes them uncomfortable; they're too busy to find time to plan for retirement; they're too young to worry about retirement; and retirement planning is too complicated. If you find yourself making similar excuses for avoiding some serious thinking about retirement planning, it's time to change your tune.
Saving for retirement has become a more pressing concern than ever before. Companies are putting the burden of funding pension plans largely on their employees, the Social Security system is straining under the burden of an aging population, inflation erodes long-term investment returns, and life expectancies are longer. Aging baby-boomers are feeling particularly squeezed -- many are trying to save for their children's college educations and their own retirements, while supporting their elderly parents at the same time.
Personal savings will have to fill the gap between your pension and government benefits on the one hand, and your retirement needs on the other. But many Americans aren't prepared for this reality. In fact, the 2013 Retirement Confidence Survey, conducted by the Employee Benefit Research Institute, found that greater than 1/3 of workers have not saved for retirement at all.
Setting specific goals should be at the heart of your overall retirement planning strategy. That means figuring out when you want to retire and what kind of lifestyle you realistically expect to maintain in your golden years. Those answers will, in turn, help you determine how much money you'll need at retirement.
One rule of thumb says that in each year of retirement you'll need 70 percent of your annual pre-retirement income. Of course, your financial needs may be more or less, depending upon your individual circumstances. While you can't predict the rate of inflation or the return on your pension investments over the next several years, a financial planning professional can help you make some projections of how these factors will affect your savings plan.
If your projections show you'll have a financial shortfall in retirement, you have several choices: retire later, retire on less, save more, or attempt to improve your rate of return. If the first three options aren't practical or desirable, you should consider investments that have the potential to improve your rate of return if you can tolerate the risk.
Your investment strategy should be shaped by your age, time frame, tolerance for risk, and personal investment philosophy. Remember that time is your ally. By starting to save sooner rather than later, you have the potential to generate a larger nest egg down the road due to the power of compounding interest. With compounding, the growth in an investment's value is computed on the sum of the original investment plus the continual reinvestment of dividends or interest it generates. The benefits of compounding increase with time.
Retirement investing generally means long-term investing. If you can afford to tie up your money for a relatively long period, you can take on more risk with your investments. Too many business owners are extremely conservative -- stashing their savings in certificates of deposit (CDs) and money market funds, for instance -- which may leave them cash-poor at retirement time. CDs are FDIC insured and generally provide a fixed rate of return for a given period of time, usually between six months and five years. Money market funds are not insured and invest mostly in low-risk securities such as U.S. Treasury bills, and their yields are pegged to short-term interest rates.
A well-balanced, diversified portfolio of stocks, bonds and other investment vehicles is more likely to help you achieve your retirement planning goals. Despite the fluctuations of the stock market, many investment advisors adhere to the maxim that stocks are a good choice for long-term investments.
If you don't have the stomach for buying individual stocks and bonds outright, consider mutual funds. Mutual funds offer a combination of professional management expertise plus ready-made diversification. With several thousand funds from which to choose, there are funds for practically every conceivable investment objective. Some funds seek capital appreciation, others emphasize paying current dividends, and still others combine these goals.
Variable annuities offer the potential for a stream of income in the future and are another popular way to invest retirement savings. Under these contracts, the money you invest builds up free of current income taxes. The taxes are deferred until you take the money out later, usually at retirement. Variable annuities combine aspects of insurance and investment sub-accounts, and offer a variety of investment choices. Withdrawing annuity money before age 591/2
may result in a 10% early withdrawal penalty and income taxes.
Setting up a retirement planning strategy should be a top priority. More than ever, it's up to you to achieve your wealth goals. Speak to a qualified financial planner about the best way to build your nest egg and to learn which investment options make the most sense for you.
Mutual funds and variable annuities are offered by prospectus. An investor should carefully consider the investment objectives, risks, charges and expenses of an investment before investing. Read a prospectus carefully before you invest. The investment return and principal value of an investment will fluctuate with changes in market conditions so that an investor's shares when redeemed may be worth more or less than the original amount invested.
Scott Cangelosi CLU is a registered representative of Lincoln Financial Advisors, a broker/dealer, and offers investment advisory service through Sagemark Consulting, a division of Lincoln Financial Advisors Corp., a registered investment advisor. This information should not be construed as legal or tax advice. You may want to consult a tax advisor regarding this information as it relates to your personal circumstances.