Retirement Readiness: That Which Starts Well, Ends Well

Want to know the secret to reaching your financial goals for retirement? It’s two simple steps, one for when you are working, and the other concerns when you retire.

For Workers (Retirement Savers)

The first secret is to save a lot, as the cartoon says. The question is, how much is a lot? The simple, safe answer for anyone in their 20s (so this means any and all recent college grads) is to save 15% of your salary (before taxes, so your gross income) for retirement. That 15% doesn’t all have to come from your pocket, by the way. If you’re in a 401k or 403b plan and your employer contributes say 5% to your account, then you need to save only 10%.

Now some young workers in their 20s may say, “15%! I can’t afford to save that much. I’ve got student loan payments, car payments, rent, cell phone bills, etc.” The solution is to live on less than you earn, by about 15%. In other words, before you get locked into all kinds of higher expenses (like a new car loan instead of a used car loan, a 3-bedroom apartment when a 2-bedroom would do just fine, or a $150,000 mortgage instead of a $100,000 mortgage), plan to live on 85% of your income. Let that amount define your living standard. You’ll get used to it just fine in time. Your retirement saving mindset should be something like “I need to pay myself my retirement ‘bill’ every month as a top priority, just like all my other bills.”

For Retirees and Near-Retirees

The second simple step comes into play as you near retirement. That secret is to avoid large losses in your retirement investments. This step is easy to understand but often tricky to execute. And how exactly to go about it generates a lot of heated debate among academics, financial advisors, and retirement savers. Suffice it to say we won’t solve that problem in this posting.

But part of the solution is diversifying your retirement savings, or creating a diverse investment mix. Remember these savings will have to support you for the rest of your life, which may be a period of 10 to 30 years or more depending on your age at retirement. Remember too that inflation can be an unseen threat (like high blood pressure for your heart) over a few decades. Diversification can help with inflation as well.

If you want to maximize your retirement readiness, start early: save a lot. When you get near the finish line of retirement, finish strong: avoid large losses in your savings. That’s the secret to really being ready for retirement financially.

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About Mike Wilson

Michael L. Wilson, MBA, CFP®, CRC®, is the owner of Integrity Financial Planning. Prior to founding Integrity in 1998, he worked for two years as a faculty member at the College for Financial Planning in Denver, training other financial advisors. Mike has 10 years of experience in the mutual fund industry, having worked with Fidelity Investments and Invesco Mutual Funds. He holds an MBA in Finance from Baylor University. Learn more about his work at www.integrityplanner.com.
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