- No matter where we are in life, retirement is always on our minds. Knowing how to plan for it can make all the difference in making retirement a reality.
- Retirement isn’t about reaching a financial milestone, a savings number, or an income figure. It’s about defining what really matters and what will bring you true happiness.
- There is more to retirement planning than investments. You need a strategy that looks at all aspects of your life and how they will affect your finances.
- Many people follow general planning advice and rules of thumb. The key to a successful retirement is a personalized strategy for your life and your finances.
Retirement. It’s the one thing that everyone has in common. Whether you are starting your career, getting married, starting a family, or determining your ongoing career plan, retirement is the one thing that is always on our minds. Trying to understand what retirement will even look like can be challenging enough. The act of trying to save, invest, and plan for it can feel outright confusing and overwhelming.
We asked over 100 CFP® Professionals at Facet Wealth to share the one thing they wish everyone knew about retirement. Here are the top three secrets they revealed about retirement and how to successfully plan for it.
#1 – Retirement Is More Than a Financial Milestone
Most people approaching retirement ask similar questions like “How much money do I need?” or “Am I saving enough?” These are reasonable questions to ask since financial security is a critical component of living well in retirement. While money matters, the happiest retirees know that it’s not the most important thing to leading a happier, more fulfilling life.
Here’s what the happiest retirees have in common. First, they defined retirement on their own terms. To most, it’s not purely about a savings or income figure. It’s about finding a sense of purpose, remaining engaged with friends and their community, and staying connected with family. Second, they had a personalized strategy that helped them create financial security and independence that put them in control of the life they want to live.
It’s important to determine what your version of financial independence looks like. Here are some of the key questions to consider:
- Would you prefer to be debt free or have more savings?
- How important is spending time with friends and family?
- Is it about starting your own business and being your own boss?
- Do you want to volunteer and remain engaged in your community?
- Is it important to have the freedom to travel and experience different cultures?
- If money wasn’t an issue, how would you spend your time?
Defining what financial independence means to you is a critical first step in making it a reality.
#2 – It’s About So Much More Than Your Investments
Financial advice and retirement planning have historically focused on one element of your finances - your investments. While your investments are important, there are many more aspects of your financial life that you need to plan for if you want to live well today and tomorrow. Here are a few things to consider:
- Paying down debt: Whether it’s student loans or a mortgage, choosing between paying down debt, saving, or investing can be a hard decision. The right choice depends on the interest rate, tax benefits, your comfort with risk, and other factors.
- Minimizing fees and taxes: Most people focus on their investment returns. While returns matter, the fees and taxes you pay on your money can mean your returns are much lower than you think. Focusing on low cost investments and having a plan to reduce your taxes today as well as in retirement are essential strategies for success.
- Deciding when to retire: The age at which you retire affects your Social Security benefits, health care decisions and Medicare elections, and even your investment income. Delaying Social Security benefits until age 70 means your benefits will be almost 77% greater than at age 62 and even 30% greater than at your full retirement age.
- Planning for lifestyle expenses: Where you retire, the home in which you live, your lifestyle, and how you spend your money will affect your need for retirement income. Controlling your expenses leading up to retirement is just as important as how much you save and invest.
There is so much more to retirement planning than just your investments. Your path to financial independence starts with a personalized strategy that takes your entire life into account.
#3 – Cookie Cutter Advice Won’t Cut It
When it comes to retirement planning, most people follow general guidelines which are often called rules of thumb. While they can be good starting points, they are based on averages which means roughly 50% of outcomes are above and 50% of outcomes are below the general rule. Are you willing to leave your retirement up to what is essentially a coin flip? Here are some assumptions that just won’t cut it:
- Saving 20% of your income: This rule says that if you save 20% of your income (after taxes), you’ll be on track for retirement. However, this doesn’t factor in when you start saving, how your taxes will change over time, what to do if you can’t reach 20%, how much money you will need in retirement, and more.
- The 4% withdrawal rule: This rule says you can take a 4% withdrawal from your investments every year and never run out of money. For every $100,000, you can generate roughly $4,000 per year in income. But the 4% rule doesn’t account for fees, how your money is taxed (fully taxable like an IRA or tax-free like a Roth IRA), unexpected healthcare costs, or how long your retirement may last.
- Replace 70% to 80% of your income: Most advice says you only need to replace between 70% to 80% of your pre-retirement income. However, this assumes that you are saving almost 15% to 20% of your income today, your mortgage is paid off, and that your taxes will be lower in retirement.
- Ten times your income rule: Various studies indicate that you need to have ten times your salary saved by retirement. So if you make $150,000 per year, you will need about $1,500,000. If you read these studies further, you will find that the appropriate savings can range from seven times to fourteen times your annual income depending on your marital status, retirement income sources, length of retirement, and your tax bracket.
If there’s one common thread that Facet’s CFP® Professionals shared, it’s this: the sooner you define what financial independence looks like to you and start planning for it, the sooner you will start taking control of your future. Financial independence isn’t something that you achieve overnight, but it’s possible over time with the right strategy.