There is no shortage of commercials, advertisements and articles, not to mention all the various other marketing and “advice” shared on social media, about investing for retirement- many of which make the topic seem confusing, if not unattainable, for many people. Much of this information sends the message that if we save “enough” for retirement that it is a given that this time will be easy and happy.
There is, however, much more to it than just saving “enough” for retirement. Read my recent post, Creating a Balanced Plan for Retirement, to learn about the non-financial aspects of retirement that also need to be planned for.
But why is there such a focus on investing for retirement and why put so much effort into preparing for retirement, especially if you are young? Things will work out when we get to retirement, right? Not if you don’t plan for this transition.
The obvious answer why you invest for retirement, and the most common response people would provide is…”So I will have enough money when I retire.” This response doesn’t really provide a complete answer nor is it specific, especially in terms of what “enough money” means. Enough money for what exactly? This is covered more in #2 below.
Are your investments on track to reach these goals in retirement? If you are not on track, what changes do you need to make to get back on track? What is your “enough” for retirement number?
If you want to check where you are at, here are a few tools to help in the process.
Here are some additional reasons, both financial and non-financial, why it is important to invest for your retirement that are deeper than “so I can retire.” Understanding these will help you get more confident and comfortable with your level of preparedness for retirement.
1. You Will Be More Confident in the Outcome (and More Engaged in the Process)
Clearly understanding the reason(s) why you are preparing for the financial aspects of retirement will hopefully help you be more engaged in the process and committed to your success. Being more engaged in the process and understanding where you are currently at as well as where you are headed will lead you to having greater confidence about your financial situation, particularly as you move closer to and transition into retirement.
Are you engaged in creating goals for your time in retirement? These include both the financial and non-financial goals for this time.
2. Your Retirement Goal(s) Provide a Vision of What This Time Will Look Like
You know you need to save for retirement, but knowing exactly what you are saving for and having a vision for what the future will look like when you reach the goal, makes it much easier to keep plugging away. For those wanting to retire earlier, knowing what needs to be socked away can the needed motivation to change your investment strategy.
What does your retirement look like- are you prepared for all aspects of retirement? How do you want to spend your time in retirement (be specific)?
3. You Don’t Know How Long Your Retirement Will Last
Knowing how long your retirement might last (how long you will live) will help you plan for how much you need to save for your retirement goals. Although we cannot accurately predict how long we will live, having at least a rough estimate based on our current health and family history will provide an age that can be used to calculate your life expectancy.
Have you calculated your life expectancy? If not, here are a few tools to help with this. They can be found at the bottom of the Resources page.
4. It Takes Money to Enjoy Retirement (Sometimes More and Sometimes Less Than You Think)
To enjoy retirement with fewer restriction on your activities and leisure takes money. Spending money during retirement can vary widely depending upon how you want to spend your time- just as it did before retirement while you were working- but had higher steady income. Having saved enough for your ideal retirement allows you more flexibility in your spending (an extra trip to Europe perhaps!) while also providing a cushion if markets are lower or are negative for a period of time. This is particularly true in the early years of retirement when a downturn in the markets can have a substantial affect on the amount you can withdraw the next few years.
What you have invested for retirement is also connected to what you can spend in retirement. Therefore, it is also important to know what your expenses will be in retirement. Knowing your expenses helps provide the answer to the amount you need or can to draw out each month and each year during retirement, and ultimately, to what total you need to save.
While this may seem obvious, most people do not have an accurate calculation (or any calculation) of what they will spend during retirement. The only accurate way to know what you will spend during retirement is to know what you currently spend and then make adjustments for expenses you expect will change during retirement.
For those who enjoy using technology to help automate their cash flow and expense analysis, here are a few options. It is near the middle of the page under Personal Expense Tracking/Budgeting. For those who prefer using a spreadsheet, I created a template that I use. It can easily be customized to work for you; email me requesting a copy and I will send it to you.
Do you know what your spending may look like in retirement? In particular, consider things like housing costs (mortgage paid off or costs of second home), travel expenses, healthcare costs- the larger items that may change.
5. You Probably Don’t Want to (and Sometimes Can’t) Work Forever
While some people really enjoy what they do, there comes a time when you will likely want to slow down, either a little or a lot. Everyone’s situation is different and some people will be able to work when, how much and where they want. This makes it easier to continue working. However, a majority of us won’t have this flexibility when we decide to retire. Some people will have health issues that will keep them from working as they age. Some of us may need to keep working to have enough income to make ends meet or do what we want and others may want to work for the social aspects.
If there are things you want to do during retirement that require you to be active, plan to do these earlier rather than later. Planning for how long you want to (or can or able to) work also factors into #4 for calculating your income during retirement.
Have you considered whether you need to or want to work in retirement? How will you occupy your time if you are retired for 20+ years? Do your projections show your money will last for your entire retirement?
6. Things WILL Happen That You Can’t Accurately Plan For (You Need to Be Aware of This and Flexible to Altering Your Plan)
This one is last for a reason. Each of the reasons listed above will likely change before you ultimately decide to retire. Life happens. Just as there have been things that you could not predict would have happened up to this point in your life, there will be things that happen in retirement. Accurately planning for your goals should allow you to absorb many of these unexpected events without cramping your retirement. Be flexible and adjust when you need to.
Two things that cannot be accurately accounted for in retirement are health care and long-term care expenses. Understand and learn about the costs associated for each of these expenses. Although it is nearly impossible to know what we will need to save to cover these costs, what seems to be a given is that health care will continue to rise in the future. Given the uncertainty surrounding the direction of health care from Washington, this could change for the worse! Prepare for the worse, hope for the best.
A 2016 research study from Fidelity shows that a couple retiring in 2016 will likely spend $260,000 on health care during retirement. Another recent study from HealthView Services shows that when you include healthcare premiums for Medicare Parts B and D, dental insurance, deductibles, co-pays, vision, hearing and other out-of-pocket costs, the total amount a 65 year-old will spend on healthcare in retirement is over $400,000. The Fidelity number is a six percent increase from 2015. Don’t forget to include adjustments for inflation. While research provides a target number for us to use, some of us will likely spend less than this and some of us will need to spend significantly more if we live longer or have many health care needs.
Add to these that we won’t know for sure how long we will live and that the markets are unpredictable, and we have a mix of factors that are hard to plan for. Being aware of these allows us to plan as best we can while knowing we may need to alter our plan as we go.
This is by no means an exhaustive list of the reasons to invest for retirement that go beyond “so I can retire” but hopefully it provides some extra “why” points to consider as well to encourage engagement in the process and focus on your vision for your encore.
