The right way to consider age in financial planning is to use it to plan an effective retirement horizon – how many years will you need to fund and how likely are you to need to pay for some form of long term care.
The wrong way to consider age is to use it to defend an otherwise random decision to stop working. It is extremely dangerous to base your retirement on the feeling that you are entitled to it.
“Listen, I’ve worked hard for 35 years and I’m already five years older than my dad was when he retired,” goes the common though flawed rationale. “I’m done. I’m out. “
Asked what they intend to do when their money runs out (as it probably will), they respond, “I’ll figure that out when it happens.”
Well, that won’t work. You can’t take out a loan to fund your retirement, and, as your money runs out you find yourself less and less in control of the life choices you took for granted.
To establish the financial freedom you need to enjoy your retirement, you need to be proactive. Here are seven steps you need to take before you decide to retire (and none of them involves your age):
- Establish a budget. This tedious task yields a key number to consider when planning your retirement – how much money you will need each month. Of course your retirement budget will look a little different than your working budget – for one thing you’ll be withdrawing, not contributing, to a retirement plan. But the best place to start planning is by figuring out your outflow now.
- Develop disciplined spending habits. Don’t spend money you don’t have. Plan for large expenditures and try to keep debt under control. If you find yourself with too much debt…
- …Pay down your debt. This can be a very empowering project. Take a look at the numbers with both eyes open and then start systematically paying them down. Eliminate school loans, credit card balances, car loans or mortgage debt.
- Maximize your contributions to your 401(k), including those age-related catch-up provisions. The maximum employee contribution to a 401(k) in 2018 is $18,500 ($24,500 if you’re 50 or older).
- Pay yourself first. This is already happening with your 401(k) or other employer sponsored retirement plans. But, you’ll need to build a pool of money in addition to those accounts. Just set up automatic withdrawals from your checking account into a savings account or IRA .You’ll build up your portfolio without even realizing it and this will make it easier to plan for taxes and living expenses in retirement.
- Educate yourself. Take advantage of financial education classes, podcasts, books and other subscription services. The more you know and understand, the more control you can take over your retirement accounts and the better prepared you’ll be to enjoy your golden years.
- Be flexible about when you retire. Whether financially or emotionally, you may not be ready to retire when you reach your full retirement age. Do not take the timing of this decision lightly. Sit down with an advisor now (preferably one with a fiduciary responsibility to you), and review your options. Set yourself up to fully enjoy your independence during your retirement years.
If you or anyone you know would like to participate in a more detailed discussion and thorough evaluation of your retirement plan, please feel free to contact our office for a complimentary first consultation.