The definition of financial security changes as we age: The needs and wants of a newly married 30-year old are, not surprisingly, very different from those of a 70-year-old retiree. There is one thing that stays the same, however: Planning and achieving your retirement goals is a lifetime process - one that requires you to first build assets and manage retirement risks for the future, and then to turn those assets into a stream of income in retirement that will last as long as you need it to.
To understand how these steps work throughout your life, consider the following:
Stage 1: Saving for retirement
The key to affording the lifestyle you want in the future is maximizing your savings opportunities now. That's because, by saving as much as you can, as soon as you can, you can put time on your side. Time to plan, time to weather market cycles and, most importantly, time to let your savings and their earnings grow and compound.
The specific investment strategy you use to maximize your savings will vary with your age. In general, the younger you are, the more aggressive your investments can be. How can you get on the right retirement path? Consider the following steps.
• Build an emergency fund. Aim to set aside at least six months of living expenses in a savings or money market account for emergency needs.
• Make sure you're covered. If you haven't signed up for health insurance at work, do so at the first opportunity. The same goes for life insurance and/or disability income protection.
• Maximize your contributions. If you have a retirement plan at work, contribute at least as much as you need to take advantage of any matching contributions your employer may offer.
• Prepare a basic estate plan. A will and durable powers of attorney for finances and health care can help ensure your needs and those of your loved ones are met should something unforeseen happen.
Stage 2: Approaching retirement (10-15 years before retirement)
As you approach retirement, begin to focus on the kind of lifestyle you want. Share your dreams with your spouse; now is the time to work out any differences you may have about how you'd like to spend your time once you stop working.
Financial experts often recommend that you "practice" for retirement. For example, if you're thinking about relocating to a warmer climate, try visiting there several times - and not just during high season. What other key issues should you consider?
• Take stock of insurance. Make sure your coverage is sufficient to maintain your family's lifestyle should something happen to you. This includes addressing future long-term care needs.
• Save whatever you can. If you are age 50 or older, take advantage of catch-up contributions that allow you to sock away extra money in your employer sponsored plan and/or IRA.
• Rebalance your assets. Transition a portion of your higher-risk investments into less volatile (and usually lower returning) assets to help protect the wealth you've worked hard to build.
• Review and update your estate plan. Update the beneficiary designations for your insurance, investment/retirement plans, and any guaranteed income annuities you may have. Also review your will and your financial and health care powers of attorney.
Stage 3: Entering retirement (three to five years before retirement)
For many, retirement represents a new and exciting chapter in their lives. To prepare, you'll need to shift from accumulating assets to creating a plan that turns your savings into a steady stream of income that supports your lifestyle for the rest of your life. Consider these steps to get started:
• Create a budget. Calculate your needs (essential expenses) and wants (discretionary expenses) to determine exactly how much money you'll need to live on; then identify your sources of retirement income.
• Research Medicare and other health care options. Also review your survivor needs as well as long-term care protection arrangements.
• Transition your portfolio. Continue to shift assets to more conservative options. Keep at least a few growth investments to help protect against inflation and the increasing cost of living.
• Know your options. Speak with your benefits department at work to understand your options with regard to your pension or retirement plan. Among other things, you'll need to decide whether to rollover your 401(k) assets into an IRA or keep them in the 401(k).
Stage 4: Living in retirement
Retirement planning doesn't end once you stop working - your needs and wants, the economy and the financial markets are likely to change over time.
• Set up an account to manage expenses. Consider putting enough money into a money market account or cash reserve to cover your expenses for up to two years. This can help ensure you don't have to tap investments during periods of market volatility.
• Develop a distribution strategy. Work with your financial advisor to determine a reasonable withdrawal rate, then decide which retirement assets to use and when.
• Fine-tune your asset allocation. Make any needed adjustments to ensure you portfolio continues to reflect your risk profile and life expectancy.
• Review your estate plan. Take a careful look to make sure you estate plan protects you and your heirs and that it benefits the people and organizations that you intend.
This article was prepared by Northwestern Mutual with the cooperation of Kenneth A. Armstrong. Armstrong is a wealth management adviser with Northwestern Mutual, the marketing name for The Northwestern Mutual Life Insurance Co. Armstrong is based in Eagle. To contact him, call 970-328-7526, e-mail at firstname.lastname@example.org or visit at ken-armstrong.com. This information is not intended as legal or tax advice.