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Will You Really Be Ready for Retirement?

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Nest Egg!Many of us are planing for that day when we can retire. Or at least work part-time doing something we actually enjoy. However, few of us will truly be ready for retirement when the time comes. This is because we so often neglect the basics of retirement planning. Indeed, there are plenty of neglected basics of good financial management and planning that can trip you up when it comes time to retire.

If you want to retire “on time,” you will need to make plans now to prepare. Put together a financial plan that takes into account your goals for retirement, and work toward making those goals a reality. As you prepare for a successful retirement in the future, here are some things to keep in mind:

Consistency is Key

One of the most important things you can do as you prepare your finances for a brighter future is consistency. You need to be consistent in your savings plan, setting aside money each month. There are a number of retirement calculators out there that can help you figure out how much money you need to put into your retirement account each month if you want to reach your goal. You also need to be consistent about your spending, budgeting and other aspects of your financial life.

Debt is Bad

Nothing drains your retirement income potential like debt. All that money you are paying in interest to someone else is doing nothing to benefit you. It just leaks out of your budget and into someone else’s pocket. One of your goals, before you hit retirement, is to reduce your obligations as much as you can. Many people include their mortgage debt in this. You will feel more secure about your retirement, and have more money at your disposal, if you can pay down your debt — especially costly consumer debt — as quickly as possibly.

Fees are Bad, Too

It’s not just the interest you pay on debt that can reduce your real returns and slow your efforts to achieve your retirement goals; fees are a drain on your retirement as well. If you pay high fees on the funds in your retirement account over the course of 20 or 30 years, you will miss out on a substantial amount that could have been funding your retirement. If you want to maximize your retirement, you should look for low fee investments. Additionally, minimize transaction fees by avoiding constant trading. You should re-allocate your assets on occasion, but you don’t need to be constantly trading. That’s a good way to reduce your real returns.

Max Out Your Tax-Advantaged Accounts

If most of your investing is done for retirement purposes, it is a good idea to max out your tax-advantaged retirement accounts before you open other investment accounts. Make sure you are taking advantage of IRAs and 401Ks (you can have both kinds of accounts) before you use investment accounts that do not have the same advantages. And remember that your spouse’s contributions to accounts in his or her name are considered separate. So if you both have IRAs, you can contribute up to $5,000 to each IRA, for a total of $10,000. And while you’re at it, don’t leave free money on the table. If it’s an option, max out matching contributions from your employer.

So… will you be ready?

(Photo: erbutcher)

{ 19 comments, please add your thoughts now! }

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19 Responses to “Will You Really Be Ready for Retirement?”

  1. DIY Investor says:

    Good points. I would emphasize that the principle of compounding should be understood. People need to start early and be aggressive. Over the last 20 years a solid diversified portfolio has returned 8% on average per year. At that rate your money quadruples in 20 years and is up 16x in 40 years ( 25 year olds need to get this !).
    Retirement is 25 years of unemployment. Think hard on where your income will come from during that period.

    • cubiclegeoff says:

      Compounding is important, but everyone also needs to understand that you can put too much faith in a decent return over the next decades. A conservative expectation of how much compounding will impact your retirement accounts is important.

      • DIY Investor says:

        Let’s go back 20 years. Suppose you knew that terrorists would bring down the twin towers, there would be a dot.com bust with internet stocks dropping 50%, that the largest hedge fund in the country would go under, that stocks would lose 37% in one year and that oil prices would go above $100. Most people would think returns wouldn’t be good. In fact, as pointed out above a diversified portfolio quadrupled.
        What wasn’t seen was the internet, cell phones, medical advances etc. etc.
        Maybe 8% compounding is too conservative!

      • mannymacho says:

        Yeah, it’s pretty amazing to see the disparity among PF gurus of what they assume the stock market return is. I’ve heard people swear by anything from 5 to 12 percent, which of course is a gigantic difference over the long run.

        • tbork84 says:

          That is why for all of my projections and planning, I assume 6% and plan on getting well above my targets. I would much rather err on the side of caution and “oversave”.

          • DIY Investor says:

            I think that’s a good approach. Work out the saving amount assuming a 6% return and if that works then anything above 6% is gravy. It is important to keep in mind that the sequence of returns is important. Averaging 6% by getting high returns in the early years and poor returns when balances are large is not good.

  2. billsnider says:

    I am now retired five yeatrs, so i can comment on this blog.

    First thing is to be in good health. I go to the gym three days a week with my wife and we watch our diet very carefully.

    Next is to develop activities before you retire. Hard to start something new before. We are active in sports. My wife paints and i volunteer at a local charity among other activities.

    Third is to get smart about your expenses. Forget rules such as the 70% one. Know all your expenses and constantly seek ways to cut it. Do you need that big car, is full cable service worth it, can I get cheaper insurance, etc.

    Learn to relax. Enjoy the little things around you. Walk in the park. Spend time with the grandkids. Feed the birds. Spend time with friends. Read a good book. It is all about the quality of life and not about the big toys.

    Finally get knowledgeable about your money. Remember that a fool and his money soon part. I have friends who made BAD financial decisions by investing with their heart and not their brains. It destroyed them. There is a good article in the last issue of AARP about this problem.

    Bill snider

    • Shirley says:

      Bill, I wholeheartedly agree with you! I’m right behind you, having retired in 2007 at 65, and we enjoy our lives to the fullest. Learning to relax and enjoy it all is important and healthy.

      Another thing that was very important to us was to have NO outstanding debt when I retired.

      • Jo says:

        The main thing is not to have debt. We paid all debt out of the 401k when my husband was laid off. He had to start taking Social Security 8 months earlier than full retirement.

        Personally, once we paid off our home I would have only put in enough for the employer match into a 401k and then bought stocks outside of the 401k, because you have to pay regular taxes instead of capital gains taxes on every penny you pull out of a 401k.

        We have less than half of our 401k but one tenth of it was losses in the market. I could get by with $10,000 out of the 401k a year, but my husband is a big spender.

    • DIY Investor says:

      Really good outlook. Sounds like you have a really good retirement going on and thought it through before hand. I find a lot of people spend more in retirement than they do when they are working. Retirement after all is a week of Saturdays:)If you like to eat out, travel and play golf all the time watch out!

      One thing that throws people for a loop is medical costs. The research shows that people who exercise etc. have more medical costs in retirement than those who don’t. If you are obese, never exercise, and smoke 3 packs of unfiltered camels a day don’t worry about medical costs!

  3. JamesV says:

    Thanks for your comments billsnider…. I always think it’s most valuable to hear from retiree’s when talking about retirement planning. I’m a skeptic when it comes to investing, but know I need to do it.

    So conservatively, how many retiree’s are retiring at 65-75yo with $1,000,000+ available to draw from? I get such mixed feedback with this question. I’ve concluded that the number of retiree’s in this position above is very, very small (maybe 1%).

    Let’s hear from more retiree’s or people nearing retirement, please? I really value your input here.

    • Less than 1% of people who contribute to a retirement fund are able to retire with the same standard of living.

      Based on these stats – Is an IRA, mutual fund or other financial product a good wealth creation strategy?

      The 1% that do manage to retire with the same standard of living are able to do so because they have built alternative business income streams.

    • Shirley says:

      We certainly didn’t retire with a million dollars backed up, but with about half that amount and no debt.

      Our home and cars are free and clear and in good condition. Our health ins ($150 each per month) covers the bulk of our medical expenses. We have everything we need and I can’t think of anything that either of us want and don’t have. Our biggest expense right now is gasoline. ;-)

      We are reasonably frugal, probably as much from habit as need. We have no trouble at all living on SS and the distributions of his retirement plan and my IRA. Our standard of living has not changed since retirement, but our enjoyment of life has at least doubled and we both wake up smiling every day.

      Fifty years of intelligent investing and hard work and many life lessons has brought us to this point, and every bit of it was worth it.

  4. The comment from billsnider makes my point but I’ll add that most people saving for retirement make the mistake that planning is completely a financial endeavor.

    In Mitch Anthony’s book, The New RetireMentality, he cites retirees as saying that their lives in retirement are shaped by meaning and purpose.

    Talk all you want about diligent saving practices and investment strategies but finding a life of meaning and purpose, while focusing on mental and physical health, is much more important.

    • The only problem is, in most cases, people require an income stream to support their desired lifestyle or life’s purpose. These are the brutal facts. Unfortunately, a pension doesn’t cut it. However, one can be healthy, live on a pension, have a purpose and be completely content with life. It’s all relative.

      • Strebkr says:

        “desired lifestyle” Thats the key. Most people dream about things they never did when they were working. You aren’t going to retire on a yacht sailing around the world all of the sudden.

  5. Jan says:

    One of the things that we can consider is a pension. We only have about $450,000 in savings/ $450000 in housing—but we live on our $40,000 pension. We have no debt at all. We have not touched our savings yet. It makes a HUGE difference. The $1,000,000 65-75 year old was usually the self employed in my world.
    We are early retired (53/60) and doing fine.
    I am a bit concerned about the “transient inflation”. It certainly does not meet up with my ability to make money off of my savings!

  6. skylog says:

    i am “on the right path,” but i do need to work a little harder if i truly want to be safe and enjoy life to the level i hope to upon retirement. of course, all of this depends on the so many unknowns of the future. that said, i can only do my part and hope the “black swans” are few and far between.


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