October is National Financial Planning Month and a great time to think about how to plan for your financial future.
A GOBankingRates retirement survey revealed that approximately 64 percent of Americans are not prepared for retirement. Fortunately, it’s not too late to get started. Here are a few strategic ways to plan for retirement and to optimize your own financial planning process:
Save As Much as You Can
It should come as no surprise that having money set aside for retirement is critical, regardless of your income level. Even those who earn a lot of money during their lifetime won’t be in great shape during retirement if they spend too much and save too little. There are many cases of high earners who spend it all on houses, cars and vacations and end up with little in the way of savings.
It can be challenging to save for retirement, and you’ll need a nest egg to support the lifestyle you desire when you’re ready to make the transition. Whatever phase of your working life you’re in now, be sure to save as much as you can.
Expect to Live Longer Than You Think You Will
One of the most vital facts many Americans fail to realize is that they will likely have a long retirement, much longer than their parents did. According to the Social Security Administration, a 65-year-old today can expect to live another 19 to 21 years, on average.
This means that even if you spend 40 or 45 years working, you could live another 30 years in retirement. This fact highlights the importance of saving as much as you can toward retirement throughout your working years, because you may need to support yourself (and perhaps your spouse) for many years.
Plan to Spend More Than You Expect
Many Americans spend almost as much in retirement as they did during their working life. Even though the mortgage may be paid off, some people purchase second homes, travel to visit children and grandchildren or explore the world once they have more free time. When you’re retired, whatever you choose to do with your time tends to cost money. It’s important to consider that when estimating your monthly retirement expenses.
At some point, you may become less active due to normal aging or illness. This could lead to healthcare or long-term care becoming primary expenses. It’s important to consider how you will cover these costs of aging as part of your overall retirement planning.
Continue Investing in Retirement
There are many factors when it comes to managing an investment portfolio during retirement. Assuming you’ve successfully made it to retirement and are able to live within your means, your portfolio can keep growing during retirement.
It’s not uncommon for people to think that you should take less risk with your investments as you approach retirement and while you are retired, but that’s not necessarily true. Given that your expenses are likely to be higher than you expect and you’re probably going to live longer than you think, it may not be appropriate to have all of your money in low risk investments. You and your financial planner can decide which investments are right for you, based on your risk tolerance and other factors.
Anticipate Tax Implications
You may want to consider optimizing your assets for tax purposes during retirement. For example, does it make sense to convert a traditional IRA to a Roth IRA before retirement and pay the upfront taxes? To answer this question, one consideration is whether you expect your tax rate to be higher or lower during retirement.
Tax planning can be complex, depending on the types of assets you own, the value of your estate and other considerations. Accountants and financial planners can be valuable resources to help you sort through the details of your specific situation.
Financial planning doesn’t end once the retirement finish line is in sight. In fact, some of the most important strategizing can take place in the years leading up to retirement. It’s also important to continue reviewing your plan throughout your retirement years because your situation and goals are likely to change.
Remember that your financial future is in your hands during National Financial Planning Month and throughout the year. Be proactive and start planning for it today.
Michael McLeod, CFP®, is the Senior Wealth Advisor and Director of Financial Planning at The Fiduciary Group in Savannah, Ga. He can be reached at [email protected] or 912.447.6876.