Tag: Retire

You’ve probably heard of the FIRE movement (Financial Independence, Retire Early). The idea is to save like a maniac and invest your money in a way that allows you to live off of the earnings while you’re young.

While the FIRE movement has gained a lot of traction in recent years, there are still a lot of people who are hesitant to jump on board. After all, retiring early sounds like a pipe dream, right?


With a little bit of planning and a lot of discipline, retiring early is a very real possibility. In fact, it’s something that I’m working towards myself. In this guide, I’m going to show you how you can retire early, too.

First, let’s start with the basics.

What is Early Retirement?

Early retirement is, quite simply, retiring before the traditional retirement age. For most people, that age is 65. But with early retirement, you could retire in your 40s, 30s, or even sooner.

There’s no one-size-fits-all definition of early retirement. It simply means retiring earlier than the norm.

Why Would Someone Want to Retire Early?

There are a lot of reasons why someone might want to retire early. Maybe they want to spend more time with their family. Maybe they want to travel the world. Maybe they want to pursue a passion project. Or maybe they’re just sick of the rat race and want to live a simpler life.

Whatever the reason, there are plenty of people who are interested in retiring early. And there’s nothing wrong with that.

Is Early Retirement Right for You?

Now that you know a little bit more about early retirement, you might be wondering if it’s right for you.

The truth is, there isn’t a right or wrong answer. It’s a personal decision that you’ll need to make for yourself.

There are, however, a few things that you should consider before making the decision to retire early.

First, you’ll need to think about your financial situation. Can you afford to retire early? Do you have enough money saved up? Do you have a solid investment plan in place?

You’ll also need to think about your lifestyle. Are you the type of person who likes to be constantly busy? Do you enjoy working? Will you be happy with a more relaxed lifestyle?

Finally, you’ll need to think about your health. Are you in good health? Do you have any health concerns that could impact your ability to retire early

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Start by thinking about what you want to achieve financially. Do you want to be debt-free? Do you want to save for a down payment on a house? Do you want to retire early? Once you have a goal in mind, you can start working on a plan to achieve it.

Create a budget

One of the most important steps in achieving financial success is creating a budget. A budget will help you track your income and expenses so you can see where your money is going. It will also help you make informed decisions about your spending.

Save your money

Saving money is key to achieving your financial goals. You should create a savings plan that includes regular deposits into a savings account. You should also make sure to keep your savings in a safe place, such as a savings account or a CD.

Invest your money

Investing your money is another important step in achieving financial success. When you invest, you are essentially putting your money into something that has the potential to grow over time. This can include stocks, bonds, and mutual funds.

Create a financial plan

Creating a financial plan is a critical step in achieving financial success. A financial plan will help you set goals, track your progress, and make informed decisions about your finances.

Follow your plan

Once you have created a financial plan, it is important to follow it. This means sticking to your budget, saving money, and investing for the long term.

Start by thinking about what you want to achieve financially. Do you want to retire early? Do you want to buy a house? Do you want to travel the world? Once you know what you want, you can start working on a plan to achieve your goals.

Create a budget

A budget is a key tool in helping you achieve your financial goals. It allows you to track your income and expenses so you can see where your money is going. It also helps you to make adjustments to ensure that you are spending your money in a way that aligns with your goals.

Save, save, save

One of the most important things you can do to achieve your financial goals is to start saving early and often. The sooner you start saving, the more time your money has to grow. Even if you can only save a small amount each month, it will add up over time.

Invest in yourself

Investing in yourself is one of the best things you can do for your financial future. Investing in your education and career can help you to earn more money. And, investing in your health can help you to avoid costly medical bills down the road.

Create a plan

Creating a plan is the key to success when it comes to achieving your financial goals. Without a plan, it’s easy to get off track. But, if you take the time to map out a route to your goals, you’ll be much more likely to achieve them.

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I loved this article by Robert Laura as it reflects what I continue to see in my financial planning practice.  The idea of retirement can seem very enticing.  We long for an unstructured day with plenty of time for hobbies,  relaxation, and travel.   But many of us take for granted the social and intellectual stimulation we gain from being employed.  As Mr. Laura states in the article:

“Too often, retirement is portrayed as the ultimate goal and sign of freedom, but when people get there, it can feel very empty or hollow. In some cases, it causes people to feel isolated or unimportant because they are being sold on only part of retirement’s true meaning and needs.”

So many of us derive our “relevance” from our career achievements and work environment.  When people retire and lose that “connectedness” and sense of being, they often fall prey to depression, substance abuse, and marital discord.   Mr. Laura tells the story of a friend who retired and feels a loss of purpose:

I said to my buddy, “It must be great being retired … to have the time, money, and freedom to come and help your son like this.”  He paused for a moment, looked me square in the eye, and said, “Bob, don’t ever retire, because the minute you do, you won’t mean anything to anyone anymore.” Those were his exact words, “You won’t mean anything to anyone anymore!”

Furthermore, a decision to retire, especially if it is early, can create other financial planning issues.  In this article from Fox News, 50 is the new 30, the author discusses how how longevity is complicating retirement planning.   To account for the fact that people are living longer they will need to assume that their money needs to last longer, perhaps 10 years longer than they anticipated, and also plan for long term care.  According to the article, statistics show that, “Only a lucky 30 percent of the population is estimated not to need long-term care after age 65”.

Focusing on these long term qualitative and quantitative issues is the essence of successful retirement planning.

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Retirement planning can be more complex for women for various reasons.  Women live longer, take time away from work to care for their parents or children, and are often paid less than their male counterparts. 

To compound matters further,  many married men are deciding to retire much earlier than originally anticipated.  A husband’s early retirement can have profound effects on a woman’s ability to fund her retirement throughout her lifetime.  With careful planning, however, these issues can be successfully navigated to provide peace of mind that the couple will have adequate funds.

Many baby boomers are burnt out from working 20+ years in their careers and feel a burning desire to quit and travel the world.  Many men and women are leaving their corporate jobs whether by choice or by design.  Retiring in your 50s, may mean that your spouse will need funds to last 40 or more years.   Unfortunately, women, due to their higher risk of longevity, bear the brunt of a husband’s desire to retire early.   The wife may continue to work after their husband retires to provide additional income, and thus feels increased stress due to suddenly being the sole breadwinner.  Ironically, she may feel as though she needs to retire later to offset the impact of her husband’s early retirement.  Financially, a wife, especially if she has been the lower earner or worked fewer overall years than her husband, will also have lower Social Security spousal and survivor payments, if her husband chooses to take benefits early.

How can women improve planning around her husband’s desire to retire early?

  • Discuss any early retirement decision as a couple and ensure that you are both ready for other emotional, financial, and psychological change.  Be supportive and see how you can make each other’s lives more enjoyable in the interim, to see if retirement can be delayed.  It may mean that you take more time off or even phase into retirement over time.  Most importantly, balance the short term benefits of leaving work with the long term tradeoffs.
  • Try to delay taking Social Security.  If you are both healthy, you should try to delay claiming until at least your full retirement age.  Work with a fee-only financial planner to determine the optimum strategy to maximize your lifetime income based on your age and life expectancy. You can go to livingtoo100.com to get an estimate of your life expectancy.
  • Create a life plan along with your financial plan.  Determine how your lifestyle will change after retirement and make sure to share household responsibilities.  Create an ideal day, week, month, year in retirement.  Write it on paper.  Create a Pinterest board or scrapbook of things you want to do or see in retirement.
  • Realize there are significant tradeoffs.  Early retirement may mean that you can’t gift to the kids as much as you wanted or fund lavish travel plans.  Discuss how that might affect your retirement satisfaction in the long run.
  • Maximize your pension payments through a “pension max” strategy.  If you want to choose a pension benefit that provides maximum yearly income and a small survivor benefit, you need to ensure that your spouse is able to support his or her lifestyle should something happen to you.  A “pension max” strategy using laddered insurance will be necessary to offset the impact of an early death of the person who receives the large pension.
  • Consider long term care insurance—this can ease the burden of taking care of a spouse and help protect assets so that the caregiver spouse can have sufficient funds for the balance of his or her life.

Retirement planning is far more complex than just your investment allocation and selection of funds.

The many moving parts of Social Security claiming strategies, pension strategies, budgeting, withdrawals, and planning for large expenditures all come into play.  Work with a fee only financial planner to ensure that you are making appropriate decisions.  A decision to take early benefits may reduce cash flow stress in the short term, but have longer term negative repercussions.

Sorting it all out with a map of your retirement landscape and how to navigate that map, can help you sleep better at night knowing that important decisions you make about retirement are sound.

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Most people think they’ll be ready to retire when they hit a certain age or accumulate a set amount of assets. Unfortunately, they rarely do the math to determine whether their savings will sustain them after they retire. According to the 2015 Retirement Confidence Survey by the Employee Benefit Research Institute, only 48% of workers reported that they or their spouses have tried to calculate how much money they’ll need to live comfortably in retirement, and people who did attempt this calculation generally ‘guesstimated’ the numbers.

The EBRI found that most Americans spend more time preparing for the holidays than for retirement.

To stay out of financial trouble after you retire, it’s important to start planning well ahead of time. And that involves taking a hard look at the numbers.

Work the problem

Retirement projection is a big math problem, and to get the right answer, you must plug in the right figures. To start, you must have a good grasp of how much income you can expect from retirement income streams such as Social Security and pensions.

The next step is crucial: understanding how much you’re going to spend in retirement. This can be much tougher to predict, but accurate projections can mean the difference between having adequate funds for the rest of your life and outliving your savings. Neglecting this important step before making the decision to retire is unwise; deciding when to retire should be based on your financial capacity.

That’s because once you’re retired, your main source of income ends, and expenses will be covered out of savings, investments and retirement income streams. Spending is perhaps the biggest variable in retirement planning calculations. It’s easy to be complacent during working years, when a steady paycheck is coming in. So it makes sense that a huge paradigm shift occurs when the paychecks stop and cash flow shortages have to be covered from savings. Creating your own paycheck from your savings can be overwhelming.

Set a retirement spending plan

For all of these reasons, establishing a realistic retirement budget is critical. To do this effectively, consider these steps:

1. Envision your life during retirement. Make a list of what you’ll be doing and how you’ll be living. What will a typical day look like? What kinds of hobbies or volunteer work will you participate in? Will you embark on a second career? How much will you travel? Will you move to another location or maintain two residences? How much support will you provide for your kids and grandkids? What is on your bucket list and how much will realizing it cost?

2. Keep track of your current spending for at least three months. Be sure to include expenses that occur less frequently, such as insurance and dues.

3. Review this spending record. My clients are often surprised to see where they’re spending their money. This exercise enables them to align their spending with their goals, values and desires. They’re more committed to a spending plan once they have determined where their money is going because this prompts them to set priorities to ensure that they don’t spend frivolously or on items that aren’t priorities.

4. Make changes in your spending now to reflect the retirement lifestyle you envision. How will your expenses change upon retiring? Does your spending jibe with the goals you identified in the first step? Be sure to revise entries for certain expense categories, such as travel, entertainment and housing, to reflect these goals. Don’t forget to account for uncovered medical expenses and supplemental health insurance premiums, including Medicare Part B.

Watch your withdrawal rates

Once you have put together a spending plan, you can determine how much of your expenses would be covered from your investments. Most financial planners recommend that people who retire at 65 withdraw no more than 4% of savings annually. If you withdraw much more than that, you’re likely to outlive your funds, so you might need to work longer. If you retire earlier than 65, you will likely need to adjust that withdrawal rate downward, as you’ll be making withdrawals longer.

Consider working with a financial planner who specializes in retirement planning. He or she can walk you through the planning process and potentially give you confidence about the capacity of your investment portfolio to provide adequate income after you retire. The planner can also help you realize that you’re not on track and need to make changes.

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If you know that you are not in complete control of your life, it is a good idea to listen to the discussion in the following article. Life is hectic. Day to day chores, work, and family obligations can keep us from our longer term aspirations. We may have goals that we set up at the beginning of the year or a timeline that we want to accomplish as we move through certain stages of our life, but these targets can seem elusive, if we do not occasionally take a realistic assessment of our progress. Perhaps, a quick 10 minute financial audit is a good place to start.

Take ten to reflect on your financial life and measure your financial “pulse” to see if you are in decent financial shape. Here are a few quick and easy questions for you to ask yourself to complete the review:

First, are you prepared for a catastrophe?

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We all have family members, coworkers, and friends who have experienced a job loss, death, or disability. We tend to think naively that a similar event would never happen to us; but unfortunately, we are not immune from hardship. Ask yourself the following specific questions.

  • Is your job secure? If not, do you have at least 6 months cash to cover your expenses until you can find employment?
  • If you or your loved one were to die, would there be sufficient insurance to cover your future living expenses such that you could maintain your current lifestyle?
  • Do you have an updated will and other estate planning documents or would there be chaos or confusion among your family members upon your death or incapacity?
  • If the primary earner was to become disabled, how would you cover the lost income from his or her salary?
  • If you have group disability, will the after tax benefit be sufficient to pay your monthly living expenses? (Disability benefits for which premiums are paid with pretax dollars are taxable, whereas benefits paid with after tax dollars are tax free).
  • Even if you were to cover the basics through a disability policy, would you be able to still save for retirement?

These are tough questions to ponder, but very important to consider, just in case the unthinkable happens. The probability of a disability is very real. Statistics show that just over 1 in 4 of today’s 20 year-olds will become disabled before they retire, and that of the 37 million disabled Americans(in 2013), 50% are in their working years (age 18-64).*

In fact, a typical non-smoking female, age 35, 5’4″, 125 pounds, who works in an office job with some outdoor physical responsibilities, and who leads a healthy lifestyle, has a 24% chance of becoming disabled for 3 months or longer during her career with a 38% chance that the disability will last 5 years or longer. The typical male has a 21% chance of becoming disabled with the same rate as females of a long term disability (38%).* Of course, the risks are higher for people who do not live a healthy lifestyle.

If you can’t answer the questions above, or you are concerned that you are not protected in the event of an unforeseen circumstance, you need to focus on risk management. You should immediately look into additional insurance coverage to protect against these events.

Second, are you moving closer to your important life goals?

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If you need to purchase a car or other large purchase in the near future, are you gradually saving money in a separate savings account so that you can pay for your purchase in cash?

Are you contributing annually to your kids’ college funding accounts?  It is best to start as early as possible so that you save less each year. If you wait until the kids are in high school, there are fewer years to save and the process will be much more onerous. Time and dollar compounding make the process easier requiring that you save less over time.

Are you saving at least 10% of your salary (not including your employer contribution) for retirement and are you on track to retire? (A basic rule of thumb is for a retiree to amass roughly 15 times their income by age 65. By age 50, you should have about 6 times your income saved; and at 40, 2.5 times your income saved.) If you are behind, you will need to save more than 10%.

Third, do you understand what your invested in and why?

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You should primarily be aware of how much exposure to the stock market you have and if that makes sense given your age, goals, and investing personality.  Ultimately, you should have a low cost, diversified portfolio of funds that you can stick with, even in the event of a very large market correction.

You should also not be paying high fees for investment management and for “active” funds. If you think you are paying too much or are worried you have too many accounts that are spread over several investment companies, you would likely benefit from cost reduction, consolidation, and simplification.

Finally, do you have anxiety over any aspect of your financial life?

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If there is something that is bothering you, it is important to address it quickly and thoroughly so that you can sleep better at night. Furthermore, if you are the kind of person that would find it hard to quickly pull together your key financial documents such as recent tax forms, investment statements, and insurance policies, you will likely benefit from some financial housekeeping and coaching. Awareness and intention are important elements for financial success.   To this end, you may find that working with a financial advisor or coach is a great way to improve and enhance your financial security.

The financial planning process is a great way to create a roadmap for your financial life. Working with a fee only CERTIFIED FINANCIAL PLANNERTM professional is a great place to start. The planner can put together a comprehensive plan and then meet with you to review the plan on at least an annual basis.  For my clients, each year I provide a color coded financial “report card” that measures progress toward specific financial goals in all areas of their financial life—insurance, cash flows, college planning, retirement planning and estate planning.

We also review their portfolio, and discuss market valuations and the very real and ongoing potential for markets to correct. This ensures that the client is mentally and emotionally prepared for market volatility and protects them against irrational behavior at market peaks and troughs. A tax checklist is also reviewed to see if there are opportunities to reduce taxes, both in the short and long term.

Annual reviews are an essential part of the financial planning process. They provide feedback on progress and direction in response to changes in financial markets and retirement and tax legislation. Most importantly, they provide moral support and encouragement for the client. The review forces clients to focus on their finances in an intentional way.

I once told one of my long term clients that since she had been coming in for years and her plan was in good shape, we could move to less frequent reviews, say every other year, if she wanted. She commented that she was happy to pay the fee for more frequent reviews, as it forced her to pull her information together and give it a good look every year. This annual exercise was meaningful for her and well worth the time and investment.

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At this middle age you might have thought about what you will become in 10 years, 20 years, even when you retire. However, for some people, they might just simply lead a life without a clear direction even if they are nearing their retirement age.

Many Baby Boomers are working long and hard in stress-filled jobs. After 20-plus years laboring in the same industry, performing the same duties day in and day out, they have gradually lost the passion they once had for their career. In a “flight or fright” response, they are reflexively expressing a desire to retire early and rid themselves of their daily toil.

This knee-jerk desire to tell their boss to “take this job and shove it” often occurs due to a lack of purpose and passion in their everyday life. Perhaps, rather than trying to retire at the age of “50 something”, these frustrated workers should instead consider redesigning their work life such that it aligns with their core values. In doing so, they may find work to be a source of pleasure and excitement as opposed to a continued source of stress. Their physical health may improve too, as studies show that continuing to work later in life can significantly improve physical and mental well-being.

This blog was inspired by a presentation given by Randy Gardner, JD, LLM, MBA, CPA, CFP(R) at the 19th annual Garrett Planning Network retreat which I recently attended. Mr. Gardner emphasized that many retirement plans, especially early retirement plans, fail because the retiree does not have his or her “next step” configured.

A retiree’s ext step— Ask what am I retiring to?

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A good question to ask oneself prior to retirement is, “what am I retiring to?” It is extremely helpful to envision a typical day, week, month in retirement. How will you fill your day? What is your purpose or passion? And, better yet, why can’t you instill that passion in your workplace today?

An early retirement can be hazardous to your health.

Gardner also cited research that suggests that an early retirement may be hazardous to your health, as calling it quits early is highly correlated to an increased risk of heart attacks as well as Alzheimer’s and dementia.

In a study by the Institute of Psychiatry at King’s college, London, researchers found that keeping the brain active later in life reduce the chances of an early onset of Alzheimer’s. In fact, there was a significant link between late retirement and delayed symptoms. The researchers found no link between education or employment and dementia risk, but found that those who retired later prolonged their mental abilities above the threshold for dementia.

Furthermore, mortality rates increase with a reduction in the retirement age.

In a study out of the University of Zurich researchers found that a reduction in the retirement age causes a significant increase in the risk of premature death – defined as death before age 67—particularly for males. According to the study, one additional year of early retirement, causes an increase in the risk of premature death of 2.4 percentage points.

Losing daily structure can lead to boredom, and chronic boredom is bad for your health.

Experts purport that the root cause of declining health in retirement is due to a lack of purpose. Having a long and successful career provides structure for the week and gives us all a reason to get out of bed in the morning. Losing that structure can lead to boredom, and chronic boredom is bad for your health.

In addition to these non- financial risks, the risk of longevity, increased taxation, legislative changes to entitlement programs, and poor market returns can hamper a retiree’s ability to receive adequate lifelong income.

Plus, let’s face it; the math of an early retirement can be daunting. It is hard to work for 30 years and live off of your savings for possibly the next 50 years.  There is a good chance that you will need to downscale your lifestyle in order to make your assets last.

How can a generation of burnt out Boomers respond to these ongoing pangs for an early retirement?

“Purpose perhaps is more important than exercise.”

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Rather than retire early, Gardner suggests that burnt-out workers instead instill purpose in their lives. In fact, he believes that purpose is “perhaps more important than exercise.” Frustrated workers of all ages owe it to themselves to design a career that engages them in the things that they are passionate about. Since only 20% of workers find their jobs to be engaging, they need to commit to strategies that improve their work responsibilities and environment.

Mr. Gardner recommends that people engage in “job-crafting.” Job-crafting is the process of redesigning your job in order to engage in tasks, relationships, and intellectual pursuits that engage, excite and interest you.

Here are some tips I put together based on the job crafting concept that will hopefully help you get started in creating your purposeful career and life.

Find out which tasks you enjoy and try to incorporate them into your work.

If you would like to write, start a blog or newsletter for your company or industry. If you enjoy working in a team or competitive environment, see if there is an opportunity to join a task force in your company. If you enjoy working with your hands to create things, start a small business that allows you to do this or add these activities to your weekend to do list. During your vacations, engage in the pursuits that energize you. This will refresh you when you return to work.

Determine which relationships are most important to you and try to build these within your work day

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It could mean that you need more time with peers whom you work with, or perhaps, you crave a connection with a more experienced mentor.  You may need a study group or network of people outside your company but within your trade or industry to connect with. Increasing these connections can make you feel part of a larger group and also help you build bridges with colleagues across the country.

You may crave relationships that are outside of the workplace during the week, so you should take the time to meet with friends for lunch or dinner after work in order to get a break from the people you work with every day.

Maybe you work by yourself in a home office and you need to be more intentional about getting out and connecting with other professionals like yourself. The point is that with some soul searching, you can identify the things that frustrate you about your job and try to refine them so that they work for you.

Although I am a solo practitioner, I really value the relationships I have built over the years with other financial planners and industry professionals I have met through the Garrett Network. They make me feel like I am not alone and less isolated. I connect and engage with them through webinars, study groups, and our annual meeting.

Re-engineering your work functions could give you a renewed perspective.

Finally, we are driven by curiosity and intellect toward various careers or pursuits; periodically we need to be stimulated to nurture our creativity and sharpen our intuitive skills. Performing our job functions in the same way day in and out can make our skills stale. Re-engineering your work functions can give you a renewed perspective. Mentoring a younger employee new to the organization may also provide you with a fresh outlook on your job as well as foster camaraderie.

Complete This “Passion” Exercise

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In order to create you ideal career and personal life, I encourage you to:

  • Create long list of all of the things that you are passionate about. Compile this for all the areas of your life.
  • Pick the top ten things you are most passionate about from the list
  • Ask yourself—why do I enjoy this pursuit? Mr. Gardner encourages people to be as specific and exhaustive about what aspects of their passions they enjoy, as opposed to focusing on the activities themselves.  This particular step can provide rich insight into what really excites us and makes us tick.
  • Create a long term plan to infuse your life with elements from your passion list. We tend to get bogged down in short term thinking, which can make us irrational and depressed when we don’t reach our goals quickly. People who are able to think and plan longer term tend to be more optimistic about their situation. In short, create a plan for the next few decades as opposed to the next 365 days.

A valuable tool I recommend to my clients which helps them identify their passions, is the Highlands Ability Battery test. Its premise is that the skills or abilities that come naturally to you, tend to be the ones that you enjoy. The function of the Highlands Ability Battery test is to define each of your abilities and then determine the patterns or “clusters” into which they fall. Armed with this knowledge, individuals are able to avoid stress and achieve satisfaction with work.

Finally, remember that some stress can be a good thing. Stress is a necessary emotion and intermittent stressful events are probably what keep the brain more alert and enable you to perform better. Here is a related article on how successful people manage their stress.

Don’t plan your retirement to fail; instead, plan for passion. Not only will your work seem like play, but it will also help you achieve the financial independence you now crave.

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With a crying baby or a two-year-old throwing a tantrum you may feel ready to retire on some days! You may also have a hard time conceptualizing the relaxing vision of your “Retirement.” Alas, the day will come when our little ones have grown up, and we will all be enjoying a new kind of independence—-one that will hopefully last a long time! The question is, “Will you be ready?”

While “ready” can come with many emotional factors such as the empty nest and exiting the social network of the workplace, as a financial planner, I will focus on the financial aspects of “ready.”

First, let me define retirement. You may immediately think of the outdated images of older people sitting in Adirondack chairs reading books and wistfully gazing at the sea. We’ve all seen this picture in any number of advertisements targeted to retirees. Ahhh….how peaceful.

In reality, though, as we consider our generation, we have had our children later, we are living longer, and we will likely want to lead very active lives as we continue to age. When I talk about retirement, I really just mean that time when you are going to rely upon — and draw upon —- your accrued savings whether that is from a 401K, your IRAs, or just money from a brokerage or savings account that you have invested.

To know if you are “ready,” you have work to do before you get to the money part. Do you know what you want from this time that society calls retirement? Have you painted this picture in your mind? I challenge you to ponder what you might want for your future. If you have read my column in the past, you know that I am a strong proponent of creating a vision —- that is, really setting aside time in a serene place to feel and envision what you want to create. I recommend that you and your spouse do this separately — and then compare your answers about what your retirement will look like. It makes for very lively date night conversation!!

Once you know from a lifestyle perspective what you want to do, feel, and “have,” the next part of being “ready” is to attach costs to this vision. The purpose of doing this exercise is ultimately to answer the question, “How much money will I need for retirement?”

This question alone keeps many financial planners in business since the art of calculating this need is not easy. And, the resulting numbers are astronomical (think Millions). The list of factors and considerations that impact the amount is long. A few questions you will need to be able to answer before any planner can help you are:

What age to you anticipate you want to retire? Do you have a goal of retiring at age 50 or do expect to keep working through until your mid-sixties or beyond? Again, this is the age where you would start to rely on your assets accumulated.

How much income do you want? This is hard to get your head around, so start with your income today. Are you comfortable? I will guess that you will want at least as much as you make now, if not more. While you may reduce your expenses in retirement (home costs may be eliminated, you may relocate to a less expensive area, you no longer have to save for your children), you will have much higher health insurance costs, and you will probably want to travel or do other exciting activities that require cash.

Will you have additional income? What is your confidence level in the existence of a social security system? Do you envision yourself working part-time or starting a business? Do you have cash flow from other investments such as real estate? Are you fortunate enough to have a pension? Are you confident it will still be available when you retire?

As you can see, getting “ready” to retire is a process you can start right now. While your idea of retirement will probably change many times as you have more birthdays, the practice of creating the vision, assigning value and ensuring you are contributing enough money toward your goal is one that will serve you well in any area of your financial plan. Make sure you get ready now.

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If you are like most workers in South Carolina, you probably have procrastinated saving for retirement. Now that you have put your retirement planning on the front burner, you realize that you’ll have to aggressively ramp up your savings rate. You wonder if you can make up for lost time by being more aggressive with your investments. Unfortunately, that may not help you as much as you thought. Retirement planning is all about math, and to help illustrate the math equation, I like to use the metaphor of a garden to explain the lifecycle of retirement savings and distributions. Here are four basic questions that will help you assess your ability to retire. Reflecting on each of these questions will enable you to better understand where you need assistance and also what you are doing well.

Questions One: The Retirement Garden- How Big is Your Plot?

The amount of income you make during your career is your “human capital.” You potential capital is greatest when you are just entering the work force. Whether you work for decades with a low to modest income or you retire early and get a golden parachute worth multiple millions, think of that total income (years worked x income per year) as the land you have available to plant the seeds of your retirement savings. One way to maximize your land is to retire later or invest in your career development. It is also imperative that you protect your “land” with proper insurance such as life and disability.

Questions Two: Planting Seeds for Future Growth- What is Your Savings Rate?

It is how you cultivate your land that counts. In order to have an abundant garden, you need to plant a lot of seeds and seedlings. For example, you may have a high income for many years, but if you are not systematically saving a portion of your income (at least 10%, if not 15%) your land will not bear enough fruit in the future. Your land will be barren. Even investors with modest plots (income) who have diligently sowed the seeds of savings over the years may have more plentiful income in retirement than their profligate neighbors. This is why most financial planners recommend starting early and putting retirement savings on autopilot. To sow more seeds for retirement savings, increase your savings rate into your 401K or other retirement plan and cut back on spending to save additional amounts outside your retirement plan, if you are already at the maximum limit.

Question Three: Weeding, Feeding, and Pruning for Optimal Growth- Do You Have a Sound Investment Plan?

A well thought out investment strategy helps you maximize the growth of your “retirement garden,” but most of the heavy lifting needs to be done by acquiring land (income) as well as planting seeds and seedlings (consistent and/or significant savings). Many people think of their investments like fertilizer, and rationalize that if they increase the aggressiveness of their portfolio, they can make up for lost time. But you can’t rely solely on fertilizer for the output of your garden. Just like fertilizer, too much of a good thing, (say holding a concentrated position of one stock, maintaining too high an exposure to equities, or skewing your portfolio to highly volatile sectors like emerging markets) could undermine your progress, especially if you have limited time left to build up your retirement silo.

Proper asset allocation among low-cost, diversified asset classes such as domestic and international stocks, real estate, commodities, and high quality bonds can provide adequate growth while helping to mitigate potential losses. Just like we plant various crops to hedge our bets, we invest in various asset classes to create an all-weather portfolio. Planting a variety of crops will protect us from a variety of risks and ensure some of our harvest survives no matter what Mother Nature (or the markets) throw at us. Ideally, some investments will perform well when others underperform, and vice versa. The overall performance will be unpredictable and change as often as the weather. Consistently pruning your portfolio through periodic re-balancing of these asset classes, possibly as infrequently as once a year, will help maximize the long run return or yield of your garden.

Questions Four: Providing For Your Future Harvest- Should You Consult an Experienced Gardener?

Retirement planning and investment management need not be (complex or expensive). It is all about how investors behave within the retirement planning cycle. In order to help motivate and guide your master plan for retirement, you may want to consider seeking out the expertise of a fee-only CERTIFIED FINANCIAL PLANNER Professional. He or she will help you determine how much you need to save based on your unique goals and design a low cost investment portfolio to help build and maintain wealth as well as minimize drawdown during your distribution phase. Probably the most important benefit of a professional advisor is that he or she will keep your invested through thick and thin instead of bailing when times get tough. Some investors try to time the market by buying into the market during upswings and selling during declines. This could reduce the overall yield of their crop, just like harvesting a crop before its peak might. Instead, you will need to plant often and consistently (through dollar cost averaging).

I hope that the retirement garden serves as an inspiration for you to focus on maximizing the abundance of your retirement garden. By planting, harvesting, and consuming the fruits of your labor in a prudent manner, you will reap the rewards in the form of a satisfying retirement lifestyle.

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As we start a new year, we start to think about our goals over the next 12 months. Will we take a vacation and, if so, where? What sort of activities or hobbies will we engage in or fund for our kids? If we have a big birthday or anniversary, how will we celebrate that event and how much will it cost? These shorter-term goals tend to initiate thoughts and discussions about long-term goals.

If we spend today, how will that affect our ability to fund college or retire? As we reflect on these issues, we may feel inadequate and unable to prioritize and quantify them. More often, those longer-term goals are pushed aside given the immediacy of the day-to-day obligations. The result is that we feel a mounting and nagging pressure that we are ignoring these longer-term goals at our own peril.

That is where financial planning can be a powerful tool. It allows us to balance the short-term needs and wants with important long-term objectives. It gives us perspective and enhances accountability. More importantly, the process provides peace of mind. People with a financial plan that addresses the various aspects of their lives tend to sleep better at night.

For example, say Dr. and Mrs. Jones spend heavily on their children’s activities and vacations each year. They also pay for their kids to attend a private school. However, they have very little set aside for college education, a small emergency cash position that may only cover 2 months expenses, and almost no investments outside of their 401Ks.

They are funding a great lifestyle through current income, but since they are in their 50s, they are concerned that they have not saved enough for retirement. They worry about how to fund medical expenses in retirement and if they will be able to maintain their lifestyle throughout both of their lives.

The financial planning process helps people like this by establishing a spending plan to balance their short-term wants with their ability to retire comfortably. It may mean they need to make tradeoffs by reducing current outlays in private school or family trips in order for them to save additional funds for college and retirement. Or it may mean that they need to work longer than anticipated. Furthermore, the process may address their need to help protect their earning power over the next 15 or so years by ensuring that they have the proper disability and life insurance.

An initial plan sets the course of their financial lifecycle and yearly progress reports, not unlike annual physicals, ensure that they remain financially fit.

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