August 16, 2012 § Leave a comment
Sometimes planning can feel overwhelming. Where to start? Follow this yellow-brick road with tips from the Society of Actuaries.
Net worth – Your net worth is what remains after you subtract what you OWE (liabilities) from what you OWN (assets). For most of us our house is our largest asset. The Society of Actuaries (SOA) counsel homeowners to consider ways to produce income from their home, renting it, downsizing, in some way creating a source of income.
Hedge risk– Hedging risk is all about covering yourself, your health, your possessions from consequences of disaster usually with insurance. How much insurance do you have? What insurances might you need, and be able to afford, in retirement? Auto, home, life and long-term care insurance may be areas to consider.
Income vs. expenses – Apparently most people, according to this article, are not getting concrete with their retirement income figures. So they don’t realize how much they will actually have in Social Security, pensions and IRA income as compared to their expenses. You need to work the numbers into a budget. You can’t just dream as you plan for this phase of life. As you get closer you need to plan in a much detail as possible.
Will it last? – After you get all black and white with it, with the expenses and your expected income sources, you can do the tweaking to your discretionary spending that may need to be done. Figuring out for inflation in retirement is not the goal here. First figure out if you could, in today’s dollars, pay for the expected expenses of your impending retirement. Consider living more modestly as a way to make the income streams last. Of total assets, traditionally about four percent from your total asset value is recommended as the draw for an ongoing income per year. Since we are living longer than many previous generations, you also might consider postponing retirement in order to increase savings.
Buckets– By this I, and other financial advisors, mean segregating money into short, medium and longer-term ‘buckets’ of assets that may be invested or held differently. Because one bucket may be used immediately and needs to be ‘liquid,’ and another bucket – or account- may be used ten or more years from now and thus can afford to be invested differently and for growth. The diversification of various buckets and how they are invested, may also be a help. Some people envision two or three buckets: one for perhaps 3- 5 years, another account or accounts for money to be used up to ten years after initial retirement, and the third bucket for longer-term retirement needs.
Suitable investments – It really is important to invest in instruments in which you feel some level of understanding. Don’t extend yourself into things you – or your advisor- don’t understand very well. I’m not suggesting that if you aren’t an expert in the vehicle, you are making an inappropriate choice. But please feel some ability to grasp the use and composition of suggested investment. Keep things suitable for you and for your risk tolerance.
Review regularly– Over more than thirty years in retirement, things happen. One’s health may change, couples divorce, loved ones pass. You need to review your plan regularly so that adjustments can be made.
There is no magic carpet for retirement, or for any journey in life. But these concrete steps may get you well on your way to a beautiful retirement.