A well-crafted retirement plan can provide a good template for financial security during a retiree’s golden years. Maybe they want to travel, embark on another career, or delve further into a favorite hobby. Regardless of the path they choose, they’ll ideally have sufficient income to enjoy a comfortable lifestyle.
Retirement planning essentially involves designing a new lifestyle from the ground up. Therefore, an individual preparing for retirement should consider the lifestyle they want and the components needed to turn that vision into reality. Because each person has a singular retirement timeframe, and has different financial resources available, their retirement plan will be tailored to them.
Certain retirement planning principles apply to everyone who wants to enter the growing ranks of retirees. Private equity principal Mark Hauser outlines recommendations that apply to individuals in varied financial and life situations.
Pinpoint the Time Until Retirement
Two major factors help to drive every worker’s retirement plan. An individual’s current age, and when they plan to retire, influence the number of years available for retirement funds accumulation.
A Tale of Two Retirement-focused Workers
A worker in their early 20s likely has several decades to save and invest money before retiring in their 50s or 60s. Their savings will grow thanks to the value of compounding. In addition, this worker may be willing to invest in riskier vehicles that offer potentially higher returns.
In contrast, an individual in their 40s has considerably less time to accumulate their retirement nest egg. Therefore, they won’t get the maximum benefit from compounding. They may also decide to choose a less-risky investment strategy based on income and capital preservation.
How Inflation can Detail a Retirement Plan
Regardless of an individual’s retirement plan strategy, they should ideally receive a higher return than the current inflation rate. If they don’t, says Mark Hauser, ever-encroaching inflation will systematically erode their money’s purchasing power.
Design a Satisfying Retirement Lifestyle
Choosing a retirement lifestyle isn’t a “one size fits all” proposition. One person may look forward to traveling the globe while another plans to take classes and boost their recreational activities. And still another prospective retiree may want to dive back into the business world.
Although traveling to exotic locations can be exciting, this expensive pastime can quickly deplete the retirement fund. On the flip side, an individual might retire in a region (or a country) with a very low cost of living. This enables them to live a very comfortable life while making a smaller dent in their savings.
Choose the Right Retirement Age
Traditionally, employees often stayed on the job until retiring at the age of 65. Today, however, some workers retire early while others work until their 70s (or beyond). Individuals have varied reasons for choosing a certain retirement date.
The longer a person remains in the workforce, the more time their savings and investments can grow. In addition, they’ll slightly decrease the time period in which they need retirement income.
Finally, Mark Hauser adds that younger workers may also be engaged in retirement planning. If a young couple wants to start a family, the costs associated with raising children will decrease the amount available for a retirement plan.
Determine the Income Needed to Support this Lifestyle
Estimating the funds needed for a specific retirement path is like hitting a moving target. An individual may overspend their retirement budget, perhaps cramming in “bucket list” experiences while they’re healthy enough to enjoy them. Other retirees may encounter unexpected healthcare costs.
External factors, such as economic conditions and/or inflation, can also negatively impact an individual’s retirement budget. Naturally, building in a reserve can help a retiree weather these unexpected expenses. Accurately estimating how much money will be needed, and for approximately how long, is a difficult task.
Here’s where an upcoming retiree would benefit from professional advice. Private equity expert Mark Hauser recommends that workers engaged in retirement planning consult with a credentialed financial advisor. This skilled professional will objectively view the situation and arrive at a realistic number that takes numerous factors into account.
Identify the Available Retirement Income Sources
It’s a common misconception that retirees can live comfortably on Social Security benefits alone. Social Security retirement payments have historically been intended to replace approximately 40 percent of an average employee’s salary. The worker would be expected to make up the difference with other sources.
Today’s higher cost of living, compounded by runaway inflation, makes living only on Social Security almost impossible. For example, some Social Security-dependent retirees have had to choose between buying food or medicine. To avoid this unfortunate situation, a well-designed retirement plan should include additional income sources.
Company Pension Plans
In prior decades, long-tenured workers could draw a company pension to help sustain them for the remainder of their lives. Today, fewer companies offer pensions, and some firms have terminated their existing employee pension plans.
Employee-Funded Plans
Instead of pension plans, many companies now offer employee-funded plans such as Individual Retirement Accounts (or IRAs) or 401(k) plans. Both types of plans have maximum contributions. Private equity investor Mark Hauser says IRAs and 401(k) plans can each be key components of an employee’s retirement plan.
Individual Retirement Accounts
Every worker can legally set up their own Individual Retirement Account (or IRA). This option is available whether or not the employee has an employer-sponsored retirement plan. If workers want to contribute more than the allowed IRA amount, they may be able to place those funds in an individual investment account.
401(k) Plans
Many companies offer 401(k) or similar retirement planning vehicles. These plans allow workers to contribute pre-tax money to their retirement accounts. Like an IRA, a 401(k) has a maximum contribution limit. Employees who want to save additional money should consider an individual investment account.
Simplified Employee Pension Plans
A Simplified Employee Pension (or SEP) plan caters to business owners and their employees. Employers can establish (and fund) retirement accounts for themselves and eligible company workers.
Funded by the employer, a SEP plan permits the company to contribute up to 25 percent of each worker’s pay. Businesses of any size can set up a SEP plan. Mark Hauser notes that a SEP plan can be a useful retirement plan component.
Put the Retirement Plan in Place
Putting the retirement plan infrastructure in place is a straightforward process. By investing in employer-sponsored plans, and/or setting up individual accounts, each person can begin to save and/or invest for their future.
Establish an Emergency Fund First
Before moving ahead with a retirement plan, individuals should first ensure they are on solid financial footing. Specifically, they should establish an emergency fund that contains three to six months of normal living expenses.
By keeping this money in a high-yield savings account, the account holder can easily access their cash. They should avoid withdrawing money from their retirement account, as this will reduce their balance and incur withdrawal penalties.
Establish a Monthly Retirement Plan Contribution
Each future retiree will have a different monthly retirement savings contribution. The individual’s current and projected retirement ages, plus any already-saved retirement funds, are relevant factors.
Retirement planning experts recommend saving 15 percent of an individual’s monthly income. If an employer sponsors a retirement plan, and matches the employee’s contributions, that savings amount may be relatively easy to achieve.
Without an employer-sponsored plan, workers may begin with a 6 percent monthly contribution. Increasing the contribution by 1 percent annually, and putting pay raises into the retirement fund, will supply an added boost.
Three Guidelines to Help Stay on Track
Implementing a workable retirement plan requires commitment and a willingness to stick with it for the long haul. Experienced financial expert Mark Hauser recommends that future retirees follow these three recommendations.
Maintain Both Macro and Micro Perspectives
As with any big-picture vision, keeping an eye on the end result is important. Concurrently, breaking down the goal into smaller milestones makes it seem more achievable.
Here, Mark Hauser says aspiring retirees should not be intimidated by the large amount of money needed for a comfortable retirement. Instead, they should consistently focus on saving as much money as possible. Over time, they can funnel additional dollars into their retirement plan.
Automate the Retirement Savings Process
Workers who implement automated retirement plan deductions will find it easier to save regularly. They can’t touch the funds for other uses, and their retirement plans will grow faster than a coworker who transfers available funds. To get the ball rolling, workers can ask their employer to transfer a certain percentage of each paycheck to an IRA or 401(k) account.
Consult with a Credentialed Financial Advisor
Designing a personalized retirement plan is a major undertaking. Because most workers aren’t financial and investment experts, Mark Hauser recommends that prospective retirees obtain guidance from a recognized financial professional.
A qualified financial advisor, preferably a client-focused fiduciary, will make decisions that will benefit the retiree. As external economic conditions and the retiree’s situation change, the advisor and their client can fine-tune the retirement plan accordingly.
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