How to Ace Retirement

AARP and the Ad Council introduced a web site www.AceYourRetirement.org to encourage people to take action to save for retirement. The savings promotion effort also has a dedicated Twitter hashtag: #AcingRetirement. Below are some suggested strategies that Ace Your Retirement suggests to prepare for retirement:

• Consider waiting until full retirement age (FRA) to claim a Social Security benefit so that it is not permanently reduced. If you delay further, up until age 70, the benefit will increase by 8% for every year that you wait.
   
• File for Social Security benefits three months before you plan to start taking them. To get an estimate of how much you will receive, create an online account at https://www.ssa.gov/myaccount/.
  

• Create an estimated retirement budget. Calculate your household expenses today and project what they will be after retirement. For example, commuting costs will disappear but travel and entertainment expenses might increase.
  

• Add up your retirement savings accounts (e.g., IRA, 401(k), taxable accounts) and multiply the total by 4% (.04) to determine the amount to withdraw annually from these accounts to last about 30 years.
  

• Compare estimated retirement expenses with anticipated income from Social Security, a pension, 4% investment withdrawals, and/or other income. If you have a shortfall, working longer, downsizing, or adjusting lifestyle expenses.
  

• Organize your financial records, including an inventory of documents and where they are kept (e.g., wallet, home files, safe deposit box). Consider making “soft copies” (e.g., scanned documents on a flash drive or in a cloud server).
  

• Take advantage of available cost-saving opportunities such as senior discounts on purchases and entertainment costs (e.g., movie tickets) and income and/or property tax reductions.

 

The Ace Your Retirement web site is a good starting point for people who want a retirement savings action plan. For more impact, it can be combined with the Ballpark Estimate, which helps people determine how much they need to save to support their desired lifestyle.  Both resources provide a personalized action plan to help users ace retirement.

How to Select a Financial Advisor

Are you looking for a financial advisor (e.g., financial planner, counselor, or coach)? Here are some questions to ask according to the Association for Financial Counseling and Planning Education (AFCPE):

• What experience do you have? Ask for a brief description of financial professionals’ work experience and how it relates to their current practice.
   
• Is there an oversight body requiring ongoing education and ethics? Ask about the credentials that a professional holds and how he or she stays up to date with changes in the personal finance field.
   
• What services do you provide? Asks about credentials, licenses, and areas of expertise that determine the services a financial professional can offer.
   
• What is your approach? Make sure a professional's philosophy and approach aligns with your needs. Also consider a financial professional’s personality, communication style, and personal compatibility. 
   
• What types of clients do you typically work with? Some financial professionals prefer to work with clients whose assets fall within a particular range or are of a certain age (e.g., young adults).
   
• How much do you charge?  A financial advisor should provide an estimate of possible costs based on the work to be performed and the compensation method that is used.
   
• How will I pay for your services? Financial professionals can be paid in several ways (e.g., salary, flat fees, assets under management fees, commissions). Details should be included in a written agreement.
   
• Do others stand to gain from the financial advice you give me? Ask the professional to provide you with a description of any conflicts of interest in writing.

More information about hiring financial advisors and questions to ask can be found in Unit 10 of the Cooperative Extension Investing For Your Future course.

Retirement Planning is a 40-Year Journey

Retirement planning has been described as a “40 (or more) year journey” from the start of someone’s working life in their 20s through retirement in their 60s (or beyond). However, it is actually much longer, if you consider how long someone can live during retirement. Unlike shorter-term financial planning goals like buying a car, a house, or saving for a child’s education, retirement planning can literally take place for seven or eight decades (e.g., 20s through 80s or 90s).

Regardless of someone’s stage in life and where they are on their retirement planning journey, five retirement planning principles are timeless and apply to everyone:

¨      Set a Retirement Savings Goal- Once you set a goal, develop a retirement savings action plan. Determine your savings need with a Ballpark Estimate calculation and then begin taking steps to save the required amount.

 

¨      Save Early and Often- Set up automatic savings plans through an employer and/or investment company so that deposits are made regularly (e.g., 5% of income every payday), regardless of stock market conditions.

 

¨      Invest Part of a Raise- When you get a raise, bonus, freelance work pay, or other increase in income, invest half of it. If your employer offers “auto escalation,” sign up so that increases in savings take effect automatically.

 

¨      Don’t Delay Savings Any Further- It’s never too late to start investing for retirement. If you haven’t saved anything yet for retirement, the best day to get started is today.

 

¨      Stay Educated About Retirement Planning- Changes to Social Security rules, Medicare, and retirement savings plans are not unusual so it is important to stay up to date via financial publications, media, social media, etc.

Small Steps to Save Money

Cooperative Extension personal finance experts recently held a Twitter chat about saving money during America Saves Week 2018. Below are some key points that were shared by the chat participants:

 

• Make savings automatic by either having paychecks split between two accounts (checking and savings) or by setting up recurring bank transfers
   
• Young adults’ first jobs are a critical opportunity to save regularly and make saving a lifetime habit
   
• Studies by the America Saves program and others have shown that successful savers have a savings plan
   
• Some people react negatively to the word “saving” because it requires spending less; one participant (a financial educator) uses the word “future spending” instead of “saving” to motivate people to save
   
• Select growth-oriented investments (e.g., stocks and stock funds) for long-term goals and liquid savings products (e.g., money market funds) for short-term goals
   
• Make savings automatic. Pay yourself first and live off the rest while staying out of debt
   
• Budget, budget, budget. It’s a pain at first, but you will be able to save more than ever before by making savings an “expense” that has to be paid
   
• Try to save at least as much in a 401(k) retirement plan that your employer will match (e.g., 6% of pay)
   
• Don’t delay saving to repay debt. Do both. Compound interest is not retroactive!
   
• Learning to invest is a lifetime skill. Savings starts it all. Don’t let life get in the way of building wealth
   

People with fluctuating incomes may not be able to save automatically because they need flexibility to juggle expenses; savings should be done during “peak” months and with windfalls such as tax refunds

The Rule of 72: Applications for Investors

To quickly estimate how long it will take for a sum of money to double, divide 72 by the expected interest rate that can be earned on a savings or investment product. For example, $2,000 placed in an IRA invested in a stock mutual fund would grow to $4,000 in nine years at an 8% average annual return (72 divided by 8). The Rule of 72 assumes that the interest rate stays the same for the life of an investment and that all earnings are reinvested.

Let’s look at how $2,000 could grow over an investor’s lifetime. If a $2,000 investment is made at age 22 and earns an average 8% return, an investor would have the following amounts:

• $4,000 at age 31 (nine years later)
• $8,000 at age 40 (nine more years)
• $16,000 at age 49 (nine more years)
• $32,000 at age 58 (nine more years)
• $64,000 at age 67 (nine more years)
   
  Note that age 67 is currently the full retirement age (FRA) for persons born in 1960 or later to receive an unreduced Social Security benefit. It is, thus, a target retirement age for many young adults.
  If a $2,000 investment is made at age 31, instead of age 22, and earns an average 8% return, an investor would have the following amounts:
• $4,000 at age 40 (nine years later)
• $8,000 at age 49 (nine more years)
• $16,000 at age 58 (nine more years)
• $32,000 at age 67 (nine more years)
   
  Note that the late starter’s savings is just half of the first investor’s amount. The second investor lost the last doubling period, where the real payoff occurs, by waiting an extra decade to start investing. In other words, procrastination is very costly. Compound interest is very much like the final questions on the initial Who Wants to be a Millionnaire? game show format, where large dollar amounts get doubled on the final questions. Learn more with this online calculator.