I recently updated and delivered a presentation that I originally developed in 2004 for an online financial education class series for women sponsored by South Dakota State University Extension. The program topic was investing for retirement and the content was derived from my book Money Talk: A Financial Guide for Women, which was originally written in 2004 and last updated in 2018 (4th edition).
What struck me, as I updated the slides, was how much my personal view of financial planning in later life had changed over the past 17 years. I used to use the word “retirement” all the time in program marketing and materials in my 40s and 50s when I worked for Rutgers Cooperative Extension. Now, as a financial education entrepreneur in my 60s after four decades in academia, I chafe at the “R word” because it seems limiting and has so many misperceptions.
Hence, the title of my new book, Flipping a Switch, and the words used in the title of this post.
Another thing I noticed was the “evergreen-ness” of the 2004 slides. Most of the content is as relevant in 2021 as it was when I originally wrote it. This speaks to the timelessness of many basic investment principles and practices.
Below are seven strategies to achieve financial security for later life and throughout later life:
¨ Determine a Post-Career Income Goal- There is no magic number. The amount that people need depends on factors such as financial goals and lifestyle decisions, work plans, availability of employer benefits, health status, and estimated life expectancy. While 70% to 90% of income earned during full-time working years is often recommended, some older adults may spend 100% to 110%, especially during their “young old” years.
¨ Do the Math- A useful planning tool is the FINRA Retirement Calculator. It has 12 questions about relevant variables including money already saved, annual income need, expected income from other sources (e.g., a pension and/or Social Security), current age and tax rate, and assumed average annual return. The calculator provides a retirement analysis in text and chart form and details about asset accumulation over time.
¨ Determine An Asset Allocation- This is the percentage of investments held in different asset classes including stocks, bonds, and cash assets. Having money in different places spreads out investment risk. Key factors in determining personal asset allocation percentage weights for each asset class are age, investment time frame, and risk tolerance level, which can be determined using this online self-assessment tool.
¨ Rebalance Investments Periodically- The aim is to maintain an investor’s original asset class weightings (e.g., 50% stock, 30% bonds, 20% cash equivalent assets). This can be done by selling securities in an “overweighted” asset class or buying in an “underweighted” asset class with new money. Some people rebalance on a fixed date (e.g., birthday) each year while others rebalance when there is a 5% to 10% shift.
¨ Balance Risk and Reward- Data exist on average returns over time of various combinations of asset classes (e.g., 70% stock and 30% bonds). While past returns are no guarantee of future returns, they are instructive. Generally, the more stock in an investor’s asset allocation mix, the greater the potential for high average returns and the more volatility (i.e., the spread between gains and losses) in an investment portfolio.
¨ Set Later Life Goals- One way to set future goals is to answer several key questions about your planned lifestyle as an older adult: Where do you want to live? Will you continue to work? What hobbies and activities will you spend time on? and What activities are on your “bucket list”? Use this goal-setting worksheet to identify a deadline date and dollar amount for each financial goal.
¨ Anticipate Spending Plan Changes- Spending patterns can change quite a bit as people get older and/or step away from the labor force. Expenses that often increase in later life include medical and dental expenses, health insurance premiums, travel and entertainment, and gifts. Those likely to decrease include auto insurance and expenses, clothing, and utilities, property taxes, and home maintenance if people downsize. Income taxes may increase or decrease depending on factors such as income in later life and required minimum distributions.