Planning for retirement is a lifelong strategy
by Brendan O'KeefeThis special edition of Cape Business Personal Finance is dedicated to readers of all ages. That’s because planning for retirement should begin as early as in your 20s and 30s.
That’s never been truer than today, with two legs of the proverbial three-legged stool for retirement funding already very wobbly as is. Most companies have done away with classic pensions, and Social Security is expected to undergo significant changes if it is to remain on solid footing.
That leaves most of the responsibility up to individuals.
Whether you are decades away from retiring, months away or already there, one thing is absolute – life is always changing. Planning must therefore be as dynamic as life itself, requiring periodic examination throughout every stage in life.
In your 30s
1. 20/20 vision. Begin by picturing your ideal retirement. It’s not just the age at which you wish to retire – it’s the lifestyle you truly desire to afford. For some, it is a large home and new boat. For others, it is independence and travel. For still others, it is a new career on the Cape.
2. Check, please. Determine roughly, in today’s dollars, just how much this lifestyle will cost annually.
3. What will my future yield? Now divide that annual figure by 5 percent to determine the total savings you need for retirement. Example: If you arrive at an ideal annual retirement lifestyle of $125,000, then dividing that figure by 5 percent will come to a personal savings goal of $2.5 million. This figure does not account for inflation; but it does provide you with at least a quantifiable foundation from which then to build upon.
4. Every marathon begins with just one step. Begin working towards this future personal savings goal today. If you are 30, and your goal is to retire early at 55 with $2.5 million in savings, then you need to save roughly $36,800 annually (assuming that you can generate a 7.5 percent annual rate of return). Early retirement may not be possible, of course. But this exercise will provide you a fundamental insight to planning a retirement funding strategy. Obviously, setting retirement 10 years later will require less annual savings. It also oftentimes holds true that the likelihood of achieving your goals will be greater the earlier you begin accumulating your retirement funds (thanks to the benefits of compounding).
5. A matter of life and death. Sit down with an insurance professional to examine whether you have appropriate life insurance coverage. Should something happen to you, your entire vision may crumble. It’s not too early to also establish a relationship with an estate planing attorney – particularly if you are married with children.
In your 40s
1. Rinse and repeat. Has your ideal retirement materially changed in any way from what you envisioned in your early 30s? If so, reexamine all five of your original steps.
2. And the survey says … How well have you done with your personal savings balance? Evaluate your current balance with the benchmarks arrived at in step 4 during your 30s. At this age, it is wise to begin a relationship with a financial planner – someone with qualifications to best assist you in mapping your financial path to retirement.
3. A CPA before May to keep the taxes away. Your taxes at this age tend to get more complicated. You may now own rental property or face the dreaded Alternative Minimum Tax. As your income grows, you run the risk of deductions that go unclaimed, exemptions that go unused – and possibly credits that go lost. It makes sense to have a tax professional maximize your savings and take a vested interest in your long-term financial wellbeing. This type of personal relationship is not possible with do-it-yourself tax software packages.
4. Inherit not just the wind. It’s time to sit down with an attorney who specializes in estate planning. Make sure your needs and desires are documented properly. Should you become incapacitated either prior to or while in retirement, then you should have someone appointed to act on your behalf. As your estate grows, strategies can be implemented to effectively reduce your future estate tax, minimize or avoid probate and ensure that your funds are left to your intended heirs.
In your 50s
1. Mid-life crisis? If you have not already done so, it is definitely time to sit down with a qualified financial planner. Proactively examine whether you are on target toward reaching your personal savings goals.
2. Flawed by design? Then correct it. Should your personal savings goals not be where they need to be, a different route is required – now. It may necessitate a more aggressive allocation strategy – and reasonable risk. If you are ahead of your target, it may then be appropriate to consider a more conservative, preservation course. Don’t unnecessarily expose your wealth as so many people heading toward retirement did roughly seven years ago when they were blindsided by the bursting of the dot-com bubble.
3. Care for your long-term health. Sit down with an insurance professional to examine whether you have appropriate long-term care coverage. As with other forms of insurance, should you become incapacitated, your initial vision for retirement may crumble – and have a cascading effect on your spouse and future generations.
In your 60s
1. Professional summit. You should by now have established a cadre of professionals – financial planner, insurer, CPA and estate planning attorney – and now is a good time for them all to meet at a personal summit. What better way for them to communicate and coordinate all the pieces of your financial planning puzzle?
2. Social Security. Prior to sitting down with a Social Security agent, meet with your financial planner to determine the most effective approach to take towards integrating these funds into your overall retirement planning structure. There are strategies to reduce or eliminate the taxes associated with Social Security benefits, effectively making more funds available for your retirement.
As with most foreseen events in our lives, oftentimes the earlier we plan and the more focused, dedicated and disciplined we are in achieving these defined goals, the more successful we become in transforming our retirement vision into reality.
Brendan J. O'Keefe is a CERTIFIED FINANCIAL PLANNER® and the president and owner of O'Keefe Wealth Strategies LLC located in Orleans. He can be reached at okeefe_wealth@comcast.net. Securities offered through Cambridge Investment Research, Inc., Member NASD, SIPC. Advisory services through CIRA Inc., a Registered Investment Advisor.
Published in Cape Business Health & Wealth July/August 2007
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