Retirement. It is such a daunting topic that it is up there next to the morbid ones. Merrill Edge reports that there is a huge fear that we will live long enough to run out of money. Today, Americans in the workforce are more responsible than ever for securing their retirement, as social security slips away and student debt climbs. The Great Recession lead to lower salaries & wages, low investment returns, and lack of savings. In order to attain the financial security that past generations had more readily available, there needs to be a strict financial plan set in place as early as possible. It will be a challenge, but it is not impossible.
Have a Defined Goal & Plan
First and foremost, get all of your financial information together and deduce a comprehensive financial picture. Assess where you are now and where you want to be. Determine a set goal of how much exactly will be needed for retirement, and then ask yourself, “Am I on track?” If the answer is no, don’t freak out. Simply determine what it will take to be there (including how many more years you will have to work to achieve this). This can be a difficult task that will take lots of time and analysis. If needed, consult a financial advisor who specializes in retirement planning and discuss your goals. Having an expert second opinion can make the process less overwhelming. A financial advisor can also help you to determine whether you have a properly diversified portfolio, meaning the right balance of stocks, bonds, and other savings. Long-term investments are where you should steer your attention, to ensure that you have at least some money growing with you as you grow older. If your employer offers a pension fund, it is highly recommended to take full advantage of this retirement investment account. In January of 2008, Morgan Stanley estimated that pension funds worldwide held over $20 trillion in assets, the largest for any category of investor ahead of mutual funds, insurance companies, currency reserves, sovereign wealth funds, hedge funds, or private equity (The Economist). Lastly, when it comes to investments, take calculated risks. Warren Buffet read 100 books on investing before the age of 20. Calculate risk accordingly by making long term investments, diversifying your portfolio, and consider your age and how much risk you personally are able to take on.
Assessing your financial picture also entails managing your debt properly and as efficiently as possible. Pay down debts one by one and refinance where possible as long as refinancing is the most cost-effective alternative. Taking debt into retirement can be incredibly difficult, so try to chip away at it as much as possible while you still have a substantial income. USAToday states, “Anybody who is seriously thinking about preparing for retirement must reduce their debt…Not just credit cards. There’s mortgage debt and even student loan debt, because so many older Americans have gone back to school and financed their education or co-signed for their adult children. All of that debt is really a ball and chain around you if you are going into your golden years”.
Define Your Retirement Picture
We are all very confident that we know exactly what retirement is not. It is not getting up and going to work every weekday. But what exactly is retirement? Does it entail moving somewhere more quiet and remote? Does it entail traveling the world? Does it entail showing your many grandchildren with gifts and possibly even help with their college tuition? Or does it entail buying a second vacation home? There is no right or wrong answer to this question. Everyone wants to do something different when they retire, and it is wise to seriously consider what that is long before you actually hit retirement age so that you can plan accordingly for that new home right next to Yosemite National Park that you have always dreamed of, or for that vacation home in Italy that you want to buy so you can live in retirement closer to your roots. It is also incredibly important to plan for medical expenses that may arise, or even long-term care plans. Lastly, are these plans realistic? We can’t all retire with a fresh Bentley in the garage of our vacation home.
Prepare for an Emergency
Life happens, and we can’t control certain things that happen to use. It is imperative to have three to six months worth of expenses in savings. We never know when a car accident will happen and the other party will not admit blame, if a medical expense or even disability comes up and puts us out of work (or tons of cash), or if we are going to suddenly lose our jobs. For these types of unfortunate events, it takes a substantial amount of the stress of our backs when we know that we do not have to worry about finances on top of the stress already placed on us because of the event. Disability insurance is also never a bad idea. USAToday also mentions how to deal with other family members,
“Get a handle on your family relationships and your family plans…So many people tell me their retirement plans were thwarted by family members. You need to learn how to say no. Make sure their problems don’t become yours. You really cannot discount the extent to which family can be a huge financial drain when you are in retirement…If you were already on shaky ground, having to constantly dish out cash to adult children may be the thing that breaks you financially”.
Be Strategic About Marriage & Family
The decisions that you make when you are young are incredibly important. Make sure that if you are with someone who is careless with money, you address this prior to getting hitched. It may not be the most romantic subject, but it is important to understand your significant other’s financial spending habits if you are willing to pursue them as in the end it could affect your credit as their spouse. Share and discuss how you each feel about money and how it should be managed, and determine whether you will have joint or separate accounts. Should you decide to obtain joint accounts, a discussion about each of your credit reports and scores may be in order. Also, the two of you should open up with regards to financial obligations such as debt, child support, alimony, charitable donations, car loans, student loans, and credit car debt. With all of that on the table, set a clear and disciplined budget – and remember to be realistic when deciding on a budget together. When it comes to being in it for the long haul, issues arise and couples fight. Divorce is expensive and psychologically damaging. Try to work it out with a marriage counselor before making any rash decisions. Relationships require work.
If you are in the process of getting married, consider not having a massive and extravagant wedding. Weddings can be incredibly expensive and can leave couples in debt right at the beginning of their partnership. Don’t be tempted by frivolous examples of marriage like the Kimye wedding. For the record, Kim and Kanye didn’t even have to pay for that wedding since they got paid so much to air it on E!. The average American does not have said luxury.
For those considering the next step of having children, make a decision on how many you want, and what this will look like financially over time. Don’t have kids too early unless it is economically feasible, otherwise having a child early in life can result in significant financial setbacks starting out. Consider what you want for your children. Do you want them to participate in sports? Go to private school? Will you help pay for college tuition? Consider all of this alongside feeding, clothing, and taking care of the health of a child. Kids means a bigger house, bigger car, and smaller retirement. For the beginning stages of having a child, consider the expense of childcare, or whether one spouse will stay at home to care for the child. Stay at home parenting can be expensive as well. Money Talks News states, “for a few years, [childcare] costs might eat up most or all of your paycheck, but such expenses decline over time…if you continue to work, your earning power and retirement contributions will continue to grow”.