April 16, 2018
This is the second blog in a three-part series that focuses on anticipating and planning for retirement based on your current stage of life and expectations for the future.
Depending on your stage of life, chances are you have already begun saving for retirement. Employer-sponsored retirement programs encourage employees to prepare for the future in many ways, but primarily by making the process automatic and eliminating the burden of deciding when and how to save. While habitual contributions are no doubt beneficial when saving for retirement, without proper planning, few of us know how much we should be saving to retire comfortably.
Although there is no magic number that applies to everyone, many financial planners agree you will need about 70% of your current income to maintain your standard of living in retirement. However, most retirees have goals beyond routine living expenses, and a truly successful retirement often requires planning for unexpected life events in addition to anticipated costs. As more retirees face potentially onerous healthcare costs and the possibility of outliving their assets, the 2017 Retirement Confidence Survey reports that only 18% of American workers feel very confident about having enough money saved for a comfortable retirement.
Whether your retirement plans include exotic vacations, sending your grandchildren to college, donating to charities, or providing for future generations, clearly identifying your objectives can mean the difference between a successful retirement and falling short of your goals. Additionally, variables such as current savings, risk tolerance, inflation, taxes and Social Security benefits distinctively influence each person’s retirement planning needs. With the help of a trusted financial advisor, you can determine your unique number and align your savings and investments with the life you envision for yourself in retirement.
Current savings: If you have not been diligently saving, you will likely need to accelerate your contributions as you near retirement to cover future expenses. Your financial advisor can help you determine an accumulated savings target that can be used to guide your contributions leading up to retirement. While starting early is the best way to ensure you have the financial resources you desire in retirement, it is never too late to begin saving.
Risk tolerance: Your ability to withstand risk is an important factor in determining your investment strategy, which can range in objective from aggressive growth to capital preservation. While market volatility is a lesser consideration when you have 40 years until retirement, preserving capital may be your top priority as your investment horizon shortens. Work with your advisor to determine how your attitude towards risk impacts how much you need to save in consideration of your overall asset allocation.
Inflation: Inflation has become a bigger concern for retirees as life expectancies increase. Because retirement may span several decades, maintaining purchasing power is an important consideration when determining an appropriate investment strategy. Allocating to investment vehicles that will help your savings keep pace with inflation is essential when planning for your long-term financial needs.
Taxes: Taxes are a certainty in life, even in retirement, and should be considered when planning for retirement expenses. Most retirement accounts are tax deferred, meaning you will be taxed on withdrawals, and property and state taxes may still apply. Ask your advisor about the potential advantages of opening or converting your traditional retirement account to a Roth IRA, which provides no tax benefit for contributions but generally allows for tax-free withdrawals.
Social Security benefits: Social Security reserves are on the decline and are projected to run dry in the relatively near future. Counting on Uncle Sam for your retirement income is no longer a reliable retirement plan, especially if your retirement is decades away. Instead, you should think of your Social Security benefits as a supplement to personal savings.
A comfortable and meaningful retirement can be achieved with proper planning and discipline. Whether your lifetime dreams include traveling the world, supporting philanthropic causes, or transferring wealth to future generations, once you determine how you want to spend your time and assets in retirement, an appropriate savings strategy can be implemented so that your finances can support these goals.
Cathy Schnaubelt is a senior wealth strategist for CIBC Private Wealth Management's Houston office, with more than 35 years of industry experience. In this role, Cathy is responsible for the development of integrated wealth management solutions and provides comprehensive estate and financial planning services to high net worth clients.
This article originally appeared on Forbes.com on April 11, 2018.
John Switchenko, CTFA
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