You work hard, you try to save. Why does retirement seem so out of reach?
The problem is psychological. You probably save more than most, but do you know it’s enough? You also probably have a good idea of what you need to retire, but are you sure?
That lack of certainty is what feeds the feeling that you’ll miss the target, or that some unforeseen event will rise up and push your retirement years down the line.
You can be more sure and more relaxed about the entire topic. Here are five things you likely are doing wrong to prepare for retirement:
1. You haven’t set a date
You might be thinking, “Oh, 65, like everyone else.” The trouble is, not everyone hits that target dead on. Many people realize in their late 50s that they won’t be able to quit on time, or a corporate downsizing forces them to stop working earlier than planned.
It’s a vitally important exercise to choose a date and then, just as importantly, calculate how many years you expect to be completely in retirement, that is, with no working income. Will it be 20 years? Or maybe more like 40?
2. You haven’t set a target
Once have an estimate on your years in retirement, now you should have a good idea of how much money it will take to retire. Whatever the size of your nest egg, you can count on inflation chewing it in half every 20 years or so.
Live four decades and you will be down to a quarter of your original purchasing power. Inflation matters a lot!
3. You don’t know your costs
The other factor that matters is how fast you spend money in retirement. Planners like to cite the “4% rule,” but the assumption driving that number is that you will earn at least 7% to compensate for inflation.
Once you have your target portfolio balance, take a look at what a 4% withdrawal means in dollars, plus Social Security and any pensions you have. Can you live on that? It’s a serious question that requires a serious answer.
4. Your investments are confusing
A lot of financial advisors, upon looking into their clients’ portfolios the first time, find what they describe as a “yard sale” of assets. Stocks bought years ago. Funds that have changed managers twice. Expired bonds. Simplifying your portfolio and sticking to a plan are key goals.
5. You run risks without realizing it
You have car insurance, home insurance, health insurance. Do you have portfolio insurance? That is, do you own a mix of investments appropriate to your age and risk tolerance? If not, a market plunge might be a rude awakening and a very unwelcome lesson.
You can correct these five problems easily enough with a scratch pad, a calculator and a serious conversation with your significant other. The only thing you can really do wrong is put it off completely, hoping the answers don’t matter.