Recent studies indicate that retirement is the leading financial concern for Americans. Given the growing uncertainties around the future of Social Security and Medicare, and the approximate $11 trillion hit to our collective net worth due to the financial crisis, it is easy to see why this is the case.
While evidence indicates that the burden of securing a comfortable retirement falls squarely on our shoulders (the days of corporate and government pensions seem numbered), many Americans are failing to be proactive around saving for their retirement.
If you need to get serious about your own retirement planning, or are concerned about the planning needs of your employees, children, or grandchildren, this newsletter is for you. It will introduce a six step process that will help focus your retirement planning efforts and provide you with a framework for securing the type of retirement you or your loved ones wish for.
STEP #1 – Acknowledge that procrastination around financial matters is the costly norm in our society
Hockey legend Wayne Gretzky aptly notes that “procrastination is one of the most common and deadliest of all diseases and its toll on success and happiness is heavy.” Take for example that:
- Only 44% of workers have done a retirement needs calculation
- Average credit card debt per household exceeds the median 401k balance
- Only 20% of workers feel they are doing a good job of preparing financially for retirement
- Just 13% of workers are confident they will live comfortably throughout retirement
As we see it, a U.S. culture dominated by materialism, a lack of financial education among our nation’s populace, and a general distrust of financial advisors and the financial markets has led many to shy away from seriously addressing their retirement needs.
STEP #2 – Commit to not being one of the millions of Americans failing to be proactive around their retirement planning needs
An unknown author once said that “there’s a difference between interest and commitment. When you’re interested in doing something, you do it only when circumstance permits. When you’re committed to something, you accept no excuses, only results.”
It seems fair that we each ask ourselves whether we are interested in securing a comfortable retirement or truly committed to this process. If you find yourself lacking a real commitment to saving for your retirement, talk to your trusted advisors, your spouse or your accountability partner about how to get moving in the right direction.
STEP #3 – Undertake a goal-setting and visioning process
Visioning, or painting the picture of the ideal rest of your life is an important part of the retirement planning process. Without a clearly defined ending place in mind, it becomes difficult to engage in a meaningful planning process.
After defining what your ideal retirement looks like, you will need to put a price tag on that retirement and put a specific, goal-centered action plan in place that will allow you to get where you would like to be.
For example, a goal relating to retirement could be that you wish to generate a 30-year, inflation adjusted, pre-tax income stream of $20,000 from your retirement account.
Setting a retirement goal in this way will allow you to calculate a retirement accumulation target and will help you identify the level of annual savings and rate of return needed to meet your goals. From this point, a planner can make educated recommendations as to the appropriate positioning of your assets and construct a portfolio that is truly aligned with your specific needs and goals.
STEP #4 – Identify the most appropriate retirement savings vehicles
Whether you are a new investor looking to save a modest amount in a tax advantaged way, a business owner looking to play catch up by saving a very large amount in just a few years, or somewhere in between, there are numerous retirement plan structures appropriate for your diverse needs.
We have found that working collaboratively with your investment advisor, CPA, and in some cases, a retirement plan third party administrator will yield the best results in determining which retirement savings option is right for you.
STEP #5 – Align your portfolio with the evidence
After identifying an appropriate retirement savings vehicle, it is crucial to implement an investment approach that maximizes the likelihood of you having a successful long term experience.
While the financial media and the majority of financial advisors continue to focus on which stocks, sectors, or funds to own and which to avoid, evidence shows that this focus is misguided.
Well documented and supported research shows that globally diversified portfolios of low cost index or structured asset class funds offer the highest probability of long term investment success. Sadly, in our more than 20 years in the business, we have rarely reviewed a potential client portfolio that was truly aligned with this evidence.
STEP #6 – Commit to follow-through and discipline
Business philosopher and motivational speaker Jim Rohn notes that “discipline is the bridge between goals and accomplishment.” Without commitment, discipline, and follow-through, the achievement of your financial goals becomes increasingly challenging. We understand that remaining faithful to your investment program is often easier said than done.
Markets experience significant ups and downs. People get sick or laid off. College tuitions need to be funded. Homes and/or vehicles often need repair. Too often we see that these factors lead people to stop contributing to their retirement accounts, or worse yet, withdraw money prematurely from these accounts or take a loan from them.
There are several practical things you can do to help yourself remain committed to your financial future. The first is to educate yourself about the markets. Evidence shows that educated investors tend to be more tolerant of market fluctuations and tend to stand by their financial plans in both good times and bad. This leads to a more successful investment experience. The second is to build a cash reserve that will allow you to meet unforeseen needs without tapping into your retirement account or stopping contributions. Finally, you can automate the investment process by linking your checking account or payroll directly to your retirement account. This can help you avoid the temptation of finding other “more useful” purposes for funds destined to go toward your wealth accumulation needs.
Concluding Remarks
We know that retirement planning is a major concern for many Americans, but that it is a highly procrastinated item. We invite you to implement this six step purposeful planning process as we have seen how well it works in helping people achieve their financial goals.
As always, please feel free to use us as a resource if you would like more information on this topic. We are not commissioned sellers of financial products and are committed to being a resource for our community.
We know that the future of Humboldt County, in large part, will be driven by the financial success of its residents. We hope that our communications with you and our ongoing support to…