Need help on saving for retirement? Consider these four words.
There are four words that can be very helpful for retirement saving, writes Richard M. Rosso. For example, don't be afraid to say 'no' more often to people, especially when they ask you to lend money.
What obstacles make you veer off course when it comes to retirement planning? Increasing the odds of success shouldn’t be overwhelming, since solutions can sometimes be hiding in plain sight. Consider these four words:
1. No. If you have the habit of lending money to friends and relatives who rarely make efforts to repay you, it’s time to make your retirement a priority and use the word 'no' often. You don’t need to explain. If you’re passionate about helping, consider your support a gift. Try setting rules if saying “no” is difficult. For example, establish a specific amount in your budget for loans. Never lend to the same borrower twice in the same year. Decrease your loan budget by 10 percent every year until eventually it’s so insignificant that you’ll feel too embarrassed to say anything but “no.”
Postponing or decreasing your retirement savings by placing a priority on education savings plans or by taking on excessive debt to help your children with college funding also deserves a 'no.'
Naturally, you want your children to prosper, however, when the time comes to retire, there’s no loan, financial aid or scholarship opportunities available to you. The kids have options for funding, but you don’t. A hardline 'no' isn’t necessary.
Perhaps you can partially subsidize education costs or seek a compromise such as a public university vs. a private college. In eight out of 10 every plans I’ve designed, retirement is postponed by at least six years when parents decide to foot the entire bill for their child’s education. If families compromise, I’ve seen retirement plans postponed only a couple of years.
Mitch Anthony, author of 'The New Retirementality,' describes the modern retiree as trying to strike a perfect balance between vacation and vocation. In other words, maybe the perfect retirement plan is to say 'no' to retirement. The traditional perception of retirement is indeed dying.
2. Wait. The most common mistake I see: Retirees who plan to take Social Security retirement benefits before their full retirement age. If only they said, 'wait,' they would add thousands of additional dollars to their retirement.
I’ve had to say 'no' to clients who want to retire at age 62. What’s three more years? It goes fast and waiting can be lucrative. According to a 2008 study by T. Rowe Price, working three years longer, waiting to retire until full retirement age and saving 15 percent of your annual salary could increase your annual income from an investment portfolio by 22 percent. If you can work five more years and save 25 percent of your annual salary — it does take some work — then you can expect a surprising 50 percent more income in retirement.
If you wait to start Social Security benefits to age 70, this means an 8 percent increase plus cost-of-living adjustments. Where else can you gain a guaranteed 8 percent a year?
3. Sell. Based on a recent paper by Michael Kitces, publisher of The Kitces Report, and Wade D. Pfau, professor of retirement income at The American College, reducing stock exposure at the beginning of retirement, then increasing it over time is an effective strategy for reaching lifetime spending and portfolio goals.
The heart of the research is 'Plan U'— a 'U-shaped' allocation where stocks are a greater share of the portfolio through the accumulation/increasing human capital stage, but decrease at the beginning of retirement, then increase again throughout the retirement period.
The idea of reducing stock exposure early in retirement and increasing it later sounds counterintuitive — although from a market and emotional perspective, it’s plausible, especially now.
First, be sensitive to your comfort level, since shifting from portfolio accumulation to a distribution strategy can be stressful. Monitor progress with a financial partner or objective third party at least every quarter for validation and adjustment.
Second, stocks are not cheap based on several long-term price/earnings valuation metrics. Selling if you’re close to or at retirement may be an effective strategy. Regardless, you may need to rebalance your portfolio to free up enough cash to begin retirement account withdrawals.
Last, even though the key word is “sell,” don’t forget to periodically add back to your stock allocation.
4. Shift. Be open-minded and willing to change plans. After two devastating stock market sell-offs since 2000, and structural changes to employment, including the permanent loss of jobs, we are growing accustomed to dealing with financial adversity, and shifting our thinking to adjust to present conditions. Actions outside your control — such as poor interest rates on conservative options like certificates of deposit — can disrupt retirement savings and cash flow. In many ways, the Great Recession motivated pre-retirees to work longer and to carefully monitor their debt.
In addition, shift your thinking about continuing to save aggressively in retirement accounts as you get closer to retirement. If 80 percent or more of your investments are in tax-deferred plans, and you’re five years or less from your retirement date, consider meeting the employer match in retirement plans and saving the rest in taxable brokerage accounts. This strategy allows greater flexibility with tax planning during the withdrawal phase as generally capital gains are taxed at lower rates than the ordinary income distributed from retirement accounts.
A qualified financial and tax professional can create a hybrid process where funds are withdrawn from both tax-deferred and after-tax assets.
Shift your attitude about annuities. The purpose of an annuity is to provide an income you cannot outlive. In its purest form, an income annuity, whether immediate or deferred, can be used to bolster the lifetime income from Social Security.
Retirement planning success and satisfaction doesn’t need to be overwhelming. Simple words can be powerful tools to cut away the confusion. What other words will you consider?