How do I get Help with my Retirement Plan?
Well you’re off to a good start by being at our website, Retirement Planning Minnesota. 🙂 Seriously, there are a lot, and I mean a lot, of places to find help with your retirement not all of them good. Many of them downright awful. What this blueprint aims to do is provide you with the resources and other information you need to get a good head start on your retirement planning. Follow along, ask questions, and let us know if we missed something that you would like to see discussed.
When Should I Start Savings for Retirement?
Easy answer….as soon as possible. Ok, so maybe we didn’t all start in our 20s right after we got our first job but that’s ok. The next beset time to start is now. If you have any savings and investments so far good, if you have nothing that’s fine too, you just have a little more work to do. The right mindset is to not compare yourself to other but instead determine what you want your retirement to look like. What are you trying to accomplish in terms of goals such as travel, buying a second home, and sending the children (or grandkids) to college. This is on top of providing for your basic needs during retirement.
Where should I save my retirement Money?
This could be different for every person because of varying tax situations but in general you want to invest using tax deferred accounts. These are accounts like IRAs, Roth IRAs, 401(k)s etc. These type of accounts protect your money from taxes either through tax deferral and tax-free growth. The goal is to get as much money into these types of accounts as possible. As a rule of thumb contribute to your 401(k) up to the employer match (if they provide this), then invest outside your employer in a Roth IRA or Traditional IRA. Then if you have additional capacity to save you can go back to your 401(k) and max that out. Once you have exhausted all your retirement account options you can save into a taxable brokerage account. It is a good idea to have some money in each of these type of accounts. In doing so you will be able to draw from different sources at different periods during your retirement. For example, when you retire there may be a period of time before drawing social security, that your income is lower. In this scenario you may want to pull from your tax deferred accounts like your traditional IRA because the tax will be paid in your lower tax brackets. This type of planning ahead can save you a lot of money over time.
How Much Do I Need to Invest for Retirement?
This again is different for everyone. This is because your goals are different from other people’s financial goals. For example if you live on $200,000/year in annual spending and want to sustain your lifestyle during retirement you are going to need a lot more than someone who only spends $50,000/year. Get it? Ok so the best way to determine what you need to save is run a time-value of money calculation factoring in inflation and stock market returns projections. Combine this with a Monte Carlo simulation for the best results. Sounds like a lot? It can be. Try a simple retirement calculator like the one over a Kiplingers. That might be enough information to make you comfortable. If it’s not then you might want to seek the help of a professional fee-only financial advisor.
What Should I Invest In?
Stocks are still one of the best ways to build wealth. The stock market on average returns about 10% every year. There is, of course, quite a bit of volatility with this as stock market returns can fluctuate greatly from year to year but in general you should get about 10% by investing in the stock market over a long period of time. Use this number in your calculations in determining how much you should be saving. Don’t get too fancy with your investments as your investment expenses can go way up. Stick with Index funds like Vanguard and Schwab. If you work with a financial advisor, then you might have access to DFA Funds managed by Dimensional Fund Advisors. These funds take investing to the next level utilizing academic research to increase the efficiency and returns of standard passive indexing. A mix of both is probably best. Then as you get closer to retirement you will want to shift some of your portfolio to bonds. Stick with high grade, short term bonds and use them to preserve your cash flows. Again, do some work ahead of time to determine our proper allocation.
What If I can’t Save and Invest Enough?
There are opportunity costs to everything. Anything you spend now cannot be saved and spent in the future. So consider that if you don’t think you will have enough. Would you rather keep your $200/month cable package and retire a couple years later? Or would you rather cut your expenses and retire a little earlier. Remember it is up to you. You make choices today that will affect your future self. If you don’t want to just live off social security income then you had better save some money now. By investing it will be worth even more in the future which is why the earlier you can start the better. I believe it was the great Doctor Brown that said, “Your Future is whatever you make it so make it a good one.”
I’m confused, what do I do now?
Well you can just google it. Too lazy? Here I’ll do it for you. Ok seriously, you can either spend the time to learn more about investments, retirement planning, financial planning, and the myriad of other topics until you are comfortable with your retirement situation or you can hire someone to help. You should look for a local independent fee-only financial advisor in your area. This will give you the best chance having a successful retirement. So either do it yourself or hire someone to do it for you. Remember, in the words of Heed the words of Winston Churchill, “Failing to plan is planning to fail.”