Jacob and Leah, in their 50s, want financial independence. “We don’t mind working in our 60s,” Leah said. “But,” added Jacob, “we want work to be an option.”
Fortunately, they started saving early. Someone between ages 20 and 30 who saves $2,000 at a fixed rate of interest will have more money at age 65 than an individual who saves $2,000 each year at the same fixed rate but does so between 30 and 50. Compounding makes the difference. But keep saving. Your big savings years come when your children are financially independent (we hope) and your income is highest. If you haven’t been much of a saver, start now.
Save smart: A Roth IRA offers a great savings vehicle when your income and tax rate are relatively low. You can access contributions anytime, and after age 591⁄2 you can make tax-free withdrawals. You can contribute up to $5,500 per calendar year. Other good choices? Your employer’s 401(k) plan. Contribute up to the company-matching amount if possible. You can pause if your cash flow gets tight and then resume. Better strategy if your income goes down: Lower your spending and keep contributing.
“So where should we invest our retirement savings?” Jacob and Leah asked.
My first response: “Diversify.” Allocate your funds among stocks, bonds/fixed income investments and alternatives. Target-date funds offer a good option, but check out both how a fund allocates your dollars (in terms of type and risk) and expenses. Keeping costs and expenses down puts money in your pocket.
Put your 401(k) or 403(b) plan under the microscope. Look at mutual fund fees and expenses in your Roth IRA, traditional IRA or SEP-IRA, too. Fund expenses vary considerably. You may also face costs in rolling funds over from one plan to another. A good way to cut down those expenses: index funds or Exchange Traded Funds.
What about other revenue streams? Employer defined-benefit plans are pension plans with specified payouts — so much per month. They’re fast becoming dinosaurs, but they can help you retire in comfort.
“How about Social Security?” Leah asked.
My answer: “Figure that it will be around for you. Also realize that Social Security will cover only some of your retirement expenses unless you plan to live extremely frugally — and not in the Bay Area.” Be aware that several strategies exist for determining the age at which you claim Social Security — 62, 65 or up to 70. There even are ways to “give back” Social Security income for higher income later. Determining an effective strategy for Social Security represents one of the most important retirement-income decisions you can make. I’ll discuss this in more detail in a future column.
While we’ve been talking dollar-and-cents matters, take into account other important considerations regarding retirement. You’ll be entering a different life stage with more leisure time. What activities and interests will fill that time? Many people can’t wait to stop working. Some find out the truth in the old adage, “Be careful what you wish for.” As I cautioned Jacob and Leah, you want to retire to, not away from, something. Now is the time to explore what you’d like to do after you leave work.
Finally, if you really enjoy your work, you might continue working rather than pick an arbitrary date to stop. Work can make life fulfilling. Also, delaying retirement for just a couple of years can increase your assets and your cash flow when you do leave the workforce. Another option: Work part time in the same area or a new one. You’ll enjoy both more leisure time and another “retirement income” stream.
Let’s recap a few important points:
• If you haven’t started saving, start now. If you have, diversify your portfolio and lower expenses.
• Examine Social Security strategies; they differ from person to person.
• Think about lifestyle issues — how you want to spend your time in retirement.
How much will you need to maintain a comfortable retirement lifestyle? How much can you withdraw from your assets each year if you might live into your 80s and beyond? That’s for my next column.
Ira Fateman is a certified financial planner at SAS in San Francisco who conducts free personal finance workshops for Hebrew Free Loan (www.hflasf.org/financialfitness). Reach him at email@example.com.