Guest Post: Other Factors of Retirement Planning

There is more to retirement planning than just the part where you save money for retirement. Indeed, there are other factors that will affect how your money will be spent — and how long it will have to last. This guest post addresses some of the other factors to consider in retirement planning.

Focus on Your Goals to Achieve Retirement Readiness

By Mark J. Smith, CFP^®, CPA/PFS, CIMA^®

At M.J. Smith and Associates, we have observed that many times people fail to properly plan for their financial retirement needs because they focus exclusively on money. But retirement goals aren’t just financial. Knowing the lifestyle you want to live during retirement is the beginning of a successful wealth management plan. Do you want to tour the country in an RV, live in a house on the beach, or move closer to your children and grandchildren during retirement?

Take some time to write down your retirement goals, and share them with your financial adviser so that together you can determine your financial needs to achieve your retirement vision. By starting at the beginning—with your goals—you will ensure a completely customized retirement savings plan. When deciding how to fund the retirement goals you’ve created, please consider the following factors.

Increased life expectancy

Thirty years ago, the average life expectancy was 73 years; however, today the average life expectancy is nearly 80. We need to plan for seven more years of life than our grandparents did.

Inflation

In this country, inflation has increased 2.57 percent in the last seven years. When you retire the cost of living will be higher than it is today, and each subsequent year of your retirement will require more money than the year before to maintain the same lifestyle.

Social Security

You can’t depend on Social Security to sustain you during retirement–even for the necessities of life. We recommend that you develop your plan so that your Social Security checks will be used for things you want, not things you need.

Delaying retirement savings

Waiting to start saving for retirement could hurt you more than you think. If a 25- year-old saves $4,000 per year toward retirement for a 10 year period and has an account interest rate of eight percent annually, when she reaches 65 her retirement account will total $640,120. But if she waits until she is 35 years old and saves the same amount for retirement annually with the same interest rate for the next 30 years, her account will total $408,534 when she is 65. Waiting 10 years to start saving for retirement causes a loss of over $200,000 in this case, even though she saved for 20 extra years! This is a hypothetical illustration and is not intended to reflect actual performance.

Mortgage vs. savings

Our parents and grandparents spent their lives paying down their mortgages so they could own their homes. But today, because of the compounding nature of a liquid investment portfolio as compared to the equity in your home, you may ultimately net more money by saving first than you would if chose to pay off your home and save afterward. We recommend that your net worth consist of approximately 25 percent in home equity and 75 percent in retirement savings, at least until your total retirement needs are funded.

Retirement cash flow

Cash flow is a major retirement concern. Make a list of things you will need in retirement, such as housing, food, clothing, insurance, transportation and healthcare. Then make an additional list of things you want to have in retirement, such as a second home, travel, entertainment, and donations to charitable causes. So that you enjoy your retirement lifestyle, you should plan to fund at least some of the things you want, in addition to all of the things you need.

In addition to the issues mentioned here, other factors may contribute to when you can retire, including what investments you have made, the stability of your investments, and the sequence of your investment returns. Please contact your financial advisor if you have questions about your retirement planning.

Mark J. Smith is a Certified Financial Planner™ practitioner, a Personal Financial Specialist, a Certified Investment Management Analyst, and a Certified Public Accountant. In 2007 he was named one of the top 10 financial advisers in the U.S. by Registered Rep magazine; Barron’s named him the top-ranked independent adviser in Colorado. M. J. Smith and Associates offers fee-based services with a comprehensive financial planning approach which includes income tax planning.