Twenty Tips for a Successful Retirement
Barbara O’Neill, Ph.D., CFP®, Rutgers Cooperative Extension, oneill@aesop.rutgers.edu
Retirement planning today is very different than it was 30 or 40 years ago. It is truly not your father’s (or mother’s) retirement. In fact, many people don’t even relate to the word “retirement.” Phrases like “second act,” “third age,” and “refirement” have been used to describe the stage of later life where people transition from full-time work to other pursuits. Some people have even stated on surveys that they never plan to retire, period.
A few generations ago, defined benefit (DB) pension plans were plentiful. Workers were promised benefits according to a formula based on their income and years of service. Employers bore the actuarial risk of setting aside sufficient funds to provide a monthly income stream to workers for life but average retirements were short and lasted only about 5 years. Today, DB pension plans are much less common. The most common type of retirement plan today is the defined contribution (DC) plan (e.g., 401(k) plans) where workers bear all the investment risk.
DC plan participants must decide if and how to invest and then select specific investment products. At retirement, they have their accumulated savings and investment earnings. There are no lifetime income guarantees with DC plans as there are with DB plans. Rather, retirement income is available only for as long as assets last. Workers are responsible for converting their assets into income. In addition, average retirements today last 25 years with a possible range up to 40 (or more) years, depending on age at retirement, family health history, personal health status, and other factors.
All of these trends highlight the need for advance planning and personal responsibility in order to live comfortably in later life. Below are twenty tips to consider to achieve a successful retirement:
Before Retirement Tips
Plan for a Long Retirement- Longevity- the remaining life span for someone reaching a specific age, such as 65- has climbed dramatically in the last century. Today, retirements can easily last 25, 30, or more years. Many people under-estimate how long they will live and fail to save enough money to last their lifetime. Check several online life expectancy calculators to provide personal life expectancy estimates based on factors such as current age and health habits.
Do a Retirement Savings Needs Analysis- A simple retirement savings tool is the American Savings Education Council’s Ballpark Estimate. Calculations can be done online or with a downloadable “paper and pencil” worksheet. The Ballpark Estimate is available at www.choosetosave.org.
Prepare a Retirement Spending Plan– Start with a list of current income and expenses. Then look at the list and decide which expenses will continue (e.g., property taxes), end (e.g., commuting costs) or be reduced (e.g., clothing) after you retire. Then list new expenses that will begin in retirement (e.g., Medigap health insurance premiums). Finally, “do the math” and create a post-retirement pending plan where income is greater than or equal to expenses. A downloadable spending plan worksheet is available at: http://njaes.rutgers.edu/money/pdfs/fs421worksheet.pdf.
Follow an Investment Plan- In today’s self-reliant retirement planning environment, many workers (e.g., those in 401(k)s and other employer savings plans) are their own pension manager. Invest like a financial institution and not a nervous investor (i.e., based on a well-thought out plan and not driven by emotions such as fear and greed). Follow a dollar-cost averaging strategy by investing a regular dollar amount at a regular time interval (e.g., $100 per month).
Invest Tax-Efficiently– Start by saving enough money (e.g., 6% of pay) in an employer savings plan to earn the maximum match. Then, if you’re eligible, save the maximum allowed in a Roth IRA. Finally, if you still have money to save, continue to contribute to a tax-deferred employer plan up to the maximum and/or fund taxable savings accounts.
Invest as Much as You Can as Early as You Can– When you get a raise or promotion, increase savings in tax-deferred employer savings plans. Savings will be deducted from your paycheck. Aim to save 10% of gross income in your 20s and 30s and gradually boost savings to 15% in your 40s and 20% or more by your 50s and 60s. Another good time to ramp up retirement savings is when a household expense (e.g., child care or car loan payments) ends.
Develop an Asset Allocation Strategy and Stick With It- Determine a preferred weighting of investments (e.g., stock, bonds, and cash assets). Keep some stock or stock funds in your portfolio to hedge inflation. Periodically rebalance to get back to the target weights. Avoid being a market timer by moving money during volatile markets. Investors who do this often miss the “best market days” when the market rebounds. As a result, long-term investment performance suffers. Work Longer- Some financial experts recommend working until full retirement age to achieve what is known as a “Positive Perfect Retirement Storm.” Benefits include: larger Social Security and/or pension benefits, additional time for retirement savings plan deposits, continued access to employer benefits (e.g., health and life insurance), additional time to repay household debt and recover from market losses, and a fewer number of years that asset withdrawals are needed.
Envision the Future– Don’t wait until you’re ready for retirement to figure out what you want to do. Start thinking about life after full-time work at least a decade before. Ask yourself questions such as “What do I want to do?,” and “What makes me happy?” There is no right “one size fits all” answer because personal values and retirement resources vary widely. In addition, some people prefer a modest retirement while others expect to be very active and incur higher costs.
Plan Your Lifestyle– Do you want to stay in your current home, move to an adult living community, or move closer to family members? How will you spend your time: traveling, starting a business, volunteering? Studies have found that being active with a network of friends is a major ingredient for happiness in retirement. In addition, for those who don’t prepare for the non-financial aspects of retirement, boredom and a lack of purpose are commonly reported.
Estimate Your Social Security Benefit- Review your annual Social Security benefit estimate to determine benefit amounts at age 62, full retirement age, and age 70. Carefully consider when to claim benefits (i.e., a reduced benefit at age 62 versus larger benefits later) based on factors such as feelings about work, health status, and the financial needs of a spouse.
Downsize Your Debt– Try to pay off your mortgage prior to retirement using strategies such as principal pre-payment and/or bi-weekly payments. Not having this large monthly expense can help retirees who are living on less income (than they had while working) make ends meet. Ditto for consumer debt such as outstanding credit card balances or a car loan.
Communicate With Your Spouse/Partner– Many couples never talk about retirement decisions. A 2009 study by Fidelity Investments found that 60% of married couples did not agree on their respective retirement ages, 44% did not agree about whether they will work in retirement, and 42% had different ideas about their expected retirement lifestyle.
After Retirement Tips
Buy Yourself Some Income– Consider purchasing an immediate annuity with a lump sum distribution or a portion of invested assets. Annuities provide a stream of income for life. Look for annuities that are issued by insurance companies with low expenses and high ratings for financial stability.
Stick with Some Stock– Keep a portion of retirement assets in stocks or growth mutual funds to hedge inflation and help maintain purchasing power. Many financial advisors recommend putting enough money in cash or short-term bonds to cover 2 to 5 years of retirement expenses not covered by Social Security or other regular income sources. All or part of the remainder of a retiree’s assets can be placed in stocks, which stand a better chance of capital appreciation over time.
Do Some Math- A number of studies have concluded that it is not wise to withdraw more than 4% of invested assets annually in retirement if you want to have a good chance of having the money last 30 years. This recommendation assumes that half of the assets are invested in stocks and that there is an annual cost of living increase of 3% for inflation (except during severe bear markets). With $500,000 in savings, for example, a 4% withdrawal would be $20,000.
Consider Working After Retirement- Studies indicate that many people want to work at least part time in retirement. Sometimes this is due to financial necessity, but often it is because they find work enjoyable and because it provides a sense of purpose and daily structure. The more post-retirement income that retirees can earn, the less they have to withdraw from savings, which will help stretch their assets over a longer period of time.
Plan for Health Care Costs– A study by the Employee Benefit Research Institute estimated that a couple retiring today can expect to pay $295,000 on health insurance premiums and out-of-pocket expenses. Medicare coverage alone is simply not adequate. Retirees need to purchase health benefits from a previous employer or a supplemental “Medigap” policy.
Plan for Long-Term Care Needs– Many people mistakenly believe that Medicare will pay for long-term care needs, such as a nursing home or home health care. In reality, the government will foot the bill only if you are destitute. If you don’t think you can afford to pay for long-term care needs, consider buying long-term care insurance by your mid-60s.
Plan Retirement Asset Withdrawals Carefully– Research findings strongly suggest that retirement assets need to be withdrawn carefully in order to last longer. This includes paying attention to the sequencing of asset withdrawals (e.g., tapping taxable accounts before tax-deferred accounts) and taking withdrawals as a lump-sum versus an annuity. Consider seeking professional assistance with large lump sum withdrawals and retirement asset withdrawal scenario planning.