Retirement from the government or private job is unique to you, but it does have some rules or guidelines to follow. Over time, you may think of breaking those rules. For example, most experts talk about retirement and a three-legged stool: Social Security, a pension, and personal savings. This case may not look the same for most people, especially those working for a private-sector company. Only a few employees have pension plans guaranteeing lifetime monthly payouts. There are tons of uncertainties about the financial stability of your Social Security benefits. This means some of the expert’s suggestions that worked in the past may not apply to future retirees.
The ongoing coronavirus pandemic has left tens of millions of Americans jobless with the dramatic stock market downturn. It’s hard time we get up and try to bring some changes in the retirement rules of thumb.
Old rule: Your retirement savings should be your No. 1 priority.
New rule: Paying off debt, especially those with high-interest, should be No. 1 priority.
Paying off debt should be your number one priority. The longer you wait to pay off your debt, the more likely it will block your savings goals. Over time, you will see that most of your income is going to paying interest, so you start feeling like you can’t afford to save in the hour of crisis. If you have high-interest credit card debt, you must prioritize trying and getting out as fast as possible. Student loans taken over several years back can now become a burden on your budget.
The longer you have until you retire, the more you should emphasize paying off debt. If you want to retire at 65, and you’re in your 20s, 30s, and even 40s, you can slow down your retirement savings and pay some of it off, especially if it’s high-interest debt.
There’s one limitation to this rule of thumb.
Marguerita Cheng, a certified financial planner (CFP), said, “if your employer allows you to match retirement savings up to a certain percentage, you can save enough to contribute enough and attain the match. I think balance is important,”
According to Fidelity Investments, one of the country’s largest administrators of workplace retirement accounts stated that the most successful formula to matching a 401(k) plan is a 100 % match up to the first 3 % of an employees’ contribution; then 50 % match for the next 2 % contributed, About 40 % of 401(k) plans work on this formula.
Work with a financial planner or a budget counselor from a non-profit consumer credit counseling agency. They can help you to develop a plan to clear your debt so that you can start retirement savings as soon as possible.
Once you pay off your debt, you can contribute more to your retirement account or an IRA. You will still have the time to save.
Burley said he likes to manage the situation strategically. He is not a proponent of touching all accumulated savings and leaving the accounts empty. He always tells his clients that this is a short-term pain to get long-term gain. Your time is another ray of hope for you that he likes to give to his clients. He looks at all the debt and then recommends that his clients pay it by the due date so that they get an idea of when they can get back on track.
For example, Burley might recommend taking $500/month to pay off the debt of $6,000, then control the situation after the debt has been paid off to reassess the financial condition and then come up with a plan like allocating funds to create savings and retirement savings.
Where do you put your money? In debt or retirement?
Why should you pay off student loans first, and then start saving for retirement?
Old rule: A home is a great retirement investment option.
New rule: A home is not a great retirement investment plan.
Your home is a valuable asset, but it is illiquid, so you cannot sell it just because you need cash. But most Americans think that their home is their biggest asset.
Carolyn McClanahan, a physician, turned financial planner and founder of the fee-only Life Planning Partners based in Jacksonville, Fla said real estate returns just like the stock market. We have seen years of real estate growth and dramatic drop and long-term recessions in the real estate market. When you require some money and are forced to sell your house when the market is low, you will be hurt. Unlike stocks, your home is not liquid, so it may take you years to sell your lovely house.
When you are forced to sell your house at a loss, there could be noticeable declines in profit. Having your home is very, very important, it is not a retirement investment. Take lessons from people who suffered property losses from 2008 to 2009 and are still on break-even when the stock market has increased in value since that crash.
There’s only one way to get the cash in your home. If you have substantial equity, you can take out a reverse mortgage.
This loan product, unlike old mortgage techniques, doesn’t ask for monthly payments. Seniors with a reverse mortgage option don’t pay back their loans until they can move, sell, or die. Once their home is sold, any remaining equity after the loan repayment is distributed to that person’s estate.
To become eligible for a reverse mortgage, a person needs to be 62 or older. You need to pay off your mortgage or pay down a considerable amount to tap into your equity. Your home should be your principal residence. The most important thing is that the borrowers must maintain the house and pay property taxes and insurance of the homeowner.
Many consumer advocates advise clients and warn them about the disadvantage of using this reverse mortgage to fund retirement. If a person uses this money from a reverse mortgage to cover a noticeable drop in monthly expenses, he or she may quickly use it. There are advantages and disadvantages of using a reverse mortgage. Despite so may advertisements pointing only to the benefits, the cost of this product and its complexity need caution? While getting fascinated by the advantages, do not neglect disadvantages.
Old rule: You only need 70-80% of your pre-retirement income.
New rule: You may need to replace 100 % of your pre-retirement income.
Don’t overlook your retirement spending.
Most people think that their expenses will reduce after retirement, but many people still have a mortgage loan, home, and vehicle, spending money on grandchildren and other relatives. It is always advised to plan 100 % of what you were living on before retirement. This is a more conservative approach. It won’t be harmful to save more than expected, but it would be wrong to keep less than expected.
McClanahan says retirement has Phase 1, the go-go years, Phase 2 is the slow-go years, and Phase 3 is no-go years,
She said that during retirement, most people spend as much as pre-retirement doing all the travel stuff and making adjustments for the things that they couldn’t due while in the job.
The ongoing COVID-19 outbreak has spoiled all travel plans, but things will eventually normalize, and there will be a lot of demand to travel.
McClanahan said in Phase 2 that is the slow-go years, they get bored of traveling and want to settle down and decrease their spending decreases. In phase 3, the no-go years, healthcare costs increase, and they need to save for their expenses.
It is complicated to precisely calculate your expenses, but it is possible to reduce your monthly payments. It’s always better to overestimate your costs than underestimate to make your life better.
Retirement planning may be a guessing game. If you guess wrong, you will end up facing losses.
Old rule: Retirees should reduce their stock exposure.
New rule: No, Retirees should not reduce their exposure to stocks.
Every retiree is scared of inflation.
Eric Bronnenkant, an online financial advisor at Betterment, said many people are already aware of investment risk, but inflation is a commonly overlooked issue. During inflation, the cost of goods and services, especially medical treatment in retirement, is expected to increase. It is essential to look for a portfolio risk level so that he or she is comfortable enough to balance the risk.
How will inflation impact your investments?
Cheng points out, and it is common to spend 30 plus years in retirement. Some savings may help you to deal with inflation.
No one knows when they’ll die, so they need to keep stock or savings, considering they will live a long life. According to the Social Security Administration, one of every three aged 65 today will live up to 90, and about one out of seven live past age 95.
Douglas Boneparth, a CFP out of New York, said it is generally seen that the older you become, the fewer equities you are supposed to have because you want to lessen the risk of losing your money at a crucial time. He said that Bonds are safer than stocks. But for retirees who have a surplus sum of money for retirement, equities may help them grow their wealth more because they have an option to take on risk. They can afford to bear potential losses. On the other hand, retirees with underfunded retirement accounts depend on their stock values to get more returns on their income to sustain their lifestyle, but again they need to take a higher risk.
McClanahan said investing 100 % in bonds, and nothing in stocks in the long term works worse than adding just a small slice of shares (merely adding 10 % in stocks can make a considerable difference).
She said people should use broad-based low-cost funds to allocate stocks properly. Generally, people need to understand their power to bear the losses. If you have a small nest egg and think that you can’t afford to lose much, try to invest 10 percent to 30 percent in stocks. You can increase that percentage to 30 percent to 50 percent if you have the power to bear more protracted downturns. If you have more control, it means money, and you can increase your percentage further. Of course, if the market returns to normal, your family will live happily. If the market doesn’t, you should still feel good.
Old rule: Aim to save 10 percent of your income for retirement
New rule: Save 15 percent instead of 10 for retirement.
A significant factor that can help an employee reach millionaire’s club in their 401(k) is by increasing the savings of their annual pay. According to Fidelity, they should contribute at least 15 percent of their income to their workplace retirement plan. This percentage can be reached by combining their contributions and matching the contribution from their employer.
Why is 15 percent good?
Eliza Badeau, director of Workplace Thought Leadership at Fidelity, explained that this standard percentage level had been set considering evolving market conditions and providing a savings protection for people who may want to take early retirement or don’t want to see a massive difference in their spending,
Today, everything is costly. The cost of housing, transportation, food, and other expenses may be taking most of your money and forcing you to live on paycheck to paycheck. The economic crisis due to coronavirus might have worsened the situation and forced you to think that there is no point in saving 15% of your retirement income. Still, as the market return to normal, try to go closer to 15%.
If you are not saving anything for your retirement in your workplace plan, you should start at 1 percent or 2 percent and increase this percentage every year until you achieve a 15 percent saving goal.
Badeau said that it might not be possible for everyone to start saving for retirement. Some people in the early years of service may see this percentage and get a little scared. But we’d like to mention that this percentage includes the company match as well—the essential to start saving as early as you can, and take advantage of your company match. Increase your percentage contribution as much as you can, as those increments would give you a better standard of living.
Badeau also said nearly 27 percent of near-millennial in Fidelity-managed plans are close to hitting a 15 percent mark with a superb combination of their monthly contributions and their company match.
Some younger workers who just started the job may be in a better position than those near retirement. They may be able to contribute more because they don’t have competing financial obstacles like student loans, credit card debt or mortgages, Badeau added.
We must mention here that there are one or more exceptions to every rule, so evaluate your situation and then make your decision. Do what works best for you. But be sure while using an intentional and realistic approach about your retirement income.
Just think about it. A secure retirement doesn’t happen by chance. You need to follow the rules, and without rules, you are at risk of not having a secure retirement.
