Planning for retirement is hard, but you can do it one step at a time
You’re trying to save enough money for the rest of your life, including uncovered health costs, and you don’t know exactly how much time you need to save because, well, you don’t know how much. time you will live.
But don’t panic. While numbers are important, if you take it step by step and use the tools available, it is doable.
Spending drives everything, said Robert Powell, co-founder of Finstream.TV, editor of the Retirement Management Journal and columnist for MarketWatch, in an interview at MarketWatch’s Mastering Your Money event, which reviewed the savings, spending and investment and the impact COVID-19 has had – and will have – on our lives.
Get an idea of your expenses
People should start by figuring out what their retirement expenses will be, but Powell admits it’s no easy task.
“What your expenses will be in retirement is actually a difficult question to answer, in part because you don’t know how long you will need to fund your retirement, you don’t know your date of death… if you knew your date death, I could build you a perfect retirement plan, ”he laughed.
However, a place to start is to assume that you will have a long life. Powell suggests that people “plan” to live to be 90 or 95, which could mean 30 years of retirement.
One way to estimate what your costs will be is to “calculate” and budget for 80% of your pre-retirement income, or a better strategy, Powell said, is to use a spreadsheet or budgeting tool. to determine more precisely what your expenses will be – keep in mind that you will likely be spending more in the first few years of your retirement than in the later years.
If you’re married, make sure financial plans include enough money to cover the expenses of a surviving spouse in the likely event that one of you dies first.
Save, then save more
Save aggressively and constantly monitor whether you’re hitting your goals, so you know whether you need to save more, invest more aggressively, or work longer. “You are going to constantly monitor and adjust your plan as you go,” said Powell.
What if you worked longer to fund your retirement years?
“That’s good advice because most of the people are behind the 8-ball,” said Powell. “[Only] half of the people who say they plan to work longer until retirement are able to do so – they experience job loss, health shock, they have to become a caregiver. So telling someone to work longer is a great plan, but if it’s just a toss as to whether you will be able to work longer, you better have a backup plan for your plan. backup.
Staying healthy doesn’t come cheap, but it is manageable
Then there is the ever increasing cost of health care in retirement. Fidelity Investments said earlier this year that a 65-year-old couple retiring in 2021 would face around $ 300,000 in health care costs for the rest of their lives.
A number as impressive as this makes most of us feel hopeless, Powell said. “Most people don’t even have that much set aside in their 401 (k), so how the hell could they fund those kinds of expenses in retirement?” “
The key is not to think of it as a lump sum you need to have on hand at age 65, think of it as an annual expense.
Read Powell’s column: How to pay for healthcare costs in retirement for more ideas.
There are different types of health care costs, he pointed out. Some of these expenses are predictable and could be paid from income sources such as Social Security, while unforeseeable expenses can be paid through assets. pair.
Investors should set aside up to 15% of what they save for retirement and spend it on health care expenses. “So I think everything will be fine, because health care spending is a growing portion of a person’s retirement budget and health care spending can grow at twice the rate of the average cost of living. “
Powell said health savings accounts (HSAs) are a good way to save money for health care in retirement. If you have one at work, he advises you to fund it and not dip into it now, instead of letting it grow for future spending and investing it like you would with an IRA or 401 (k). . (Note that you must have a high deductible health plan to be eligible for a health savings account. Learn more about the HSA rules.)
If you’re not sure which investment vehicle to fund first, Powell has this advice:
“If you have a business that provides employer correspondence on your 401 (k), obviously fund them to get the full correspondence, that’s free money.” And then after that start funding your HSA to the max, and then once you’ve funded that and there is money left, think about going back to your 401 (k) and trying to maximize.
Read: 4 Ways To Cut Retirement Health Care Costs
Can I finally spend my money?
When it comes to spending the money you saved in retirement, how do you know how much you can spend? It’s called disbursement and it’s a hot topic in retirement circles. A popular rule of thumb is the 4% rule, which basically says you can take 4% out of your portfolio every retirement year and never run out of money. Not everyone is a fan, including some of the creators of the rule and Powell, who says it is no longer valid.
Read: The inventor of the “4% rule” has just changed it
“What you are doing is relying on risky assets to generate income for what is often a critical need,” Powell said. “I recently became a fan of the compartmentalized approach… because it gives you the flexibility to have exactly the amount of income you need to fund the next two or three years of your retirement. Powell wrote a useful column on the strategy of the compartment, find out more here.