Friday, August 26, 2016

Retirement Made Simple

Last time I pointed out that Social Security is not resting on as solid ground as retirees and people nearing retirement believe – or try to fool themselves into believing.  (Many younger folks are more realistic, expecting never to be lucky enough to see the benefits.)  Without government guarantees, what can you do to ensure a comfortable retirement?  The only alternative is personal savings.

Step one is to make sure your idea of a “comfortable” retirement is realistic.  Dreams of world travel may not be in the cards.  Unless you are already living within your means and have acquired significant savings, a realistic retirement will likely be no more than your current situation.  If you can’t live within your means today, the future will be no different and you will be working until you die.

To be realistic you must understand what you have coming in versus going out, but must also have strong perspective, the ability (and willingness) to distinguish between wants and needs.  The biggest drawback to preparing for a comfortable retirement is the pressure from friends, family and the media to spend for today without regard to your budget and savings plan.

Once you are skilled at living within your means, responsible use of credit cards is a good option.  Many people shun credit cards, but credit cards should be treated like a tool with several benefits enabling you to:  accurately track expenses, build credit history and get better fraud protection than debit cards or cash.  And if you pay it off in full each month, the card companies must give you the rewards and points even though you pay them no additional interest or late fees.

For the bigger purchases or emergencies, shop smarter.  Use the Internet to check competing prices and quality.  Being realistic again involves distinguishing between wants and needs.  One big foolish purchase can undermine years of careful spending.

Finally, set savings goals based on a long-term plan.  Project your needs forward. You may have fewer expenses in retirement but you may have more – remember about healthcare costs.  Then use financial planning tool, free on the Internet to help figure out how much income you'll need in retirement and convert that amount to set a target savings amount.

Convert the overall goal amount to a specific savings plan, so much per month or pay period. If you can do better, the balance can be allocated to another goal, like saving for college, and only after that spent on other luxuries you initially decided to pass up during the needs vs. wants exercise.

Finally, invest smartly and conservatively.  “Save for the short term and invest for the longer term." Bank accounts and money market funds are great for emergency savings but retirement is long term and you can’t borrow to finance it like you can for college and emergencies, so don't be concerned with the possibility of short term fluctuations.  Retirement accounts also offer tax advantages and may get additional help from an employer 401(k) match.

It takes a little arithmetic (critical thinking) and some perspective, but a few calculations and a few sacrifices now will be well worth it when you don’t find yourself in the group of seniors, struggling to survive, questioning what went wrong, regretting earlier decisions and blaming the system for giving them a bad deal.

(Thanks to Vanguard Insights for many of these savings ideas, but this is not an endorsement of any particular brand.)

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