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Saving for retirement can be a challenge no matter your income. Mapping out a plan can make the journey less rocky.
How many of you can recall driving in a car with children and hearing, “Are we there yet?” Depending on their ages it may seem like eons ago or it may be as recent as last week. It seems most people, but especially children, have a protracted attention span before additional stimulation is needed. Or is it the lack of patience? The reality of going on any journey involves a planning process. It can be involved and detailed or done quickly, depending on the ultimate destination. The reality is some effort in planning is required to get from point A to point B and more.
Now fast forward to you and your financial goals. At some point decisions need to be made allowing you to develop little or no savings to a level of monetary accumulation that will be utilized for a specific purpose in the short-, mid-, and long-term. The questions are: How will you approach this challenge, monitor your progress, and know when you have achieved your goal?
Debt and Savings
We are a debt nation, spending more than we generally. Most of us have some level of personal debt with US households collectively owing more than $12 trillion. According to the New York Federal Reserve, “Household borrowing in the US climbed to its highest level since 2010 in the third quarter , driven by increases in mortgage lending, auto loans, student loans, and credit cards.”
Debt management involves making smart decisions with every purchase. There are “rules of thumb” with debt to income ratios and consumers should be knowledgeable about these percentages to avoid potential problems. Total debt includes everything you pay for i.e., expenses, loans, taxes, insurance premiums, alimony, child support, etc. and should remain at 36% or less of your gross (before tax) monthly income. Housing costs should be 28% or less of your gross monthly income and consumer debt should be 20% or less of your net (after tax) monthly income. Savings and investing goals should be considered in conjunction with spending. According to the St. Louis Federal Reserve, US households in November 2015 saved only 5.5%. Many financial advisors would agree that this savings rate is woefully inadequate and likely will translate to shortfalls of money needed in retirement.
Allstate, in conjunction with FTI Consulting, surveyed American adults in January about their spending. Among the key findings:
• Fifteen percent of Americans polled say they find it tough to make ends meet every month.
• Only 37% of Americans report they can comfortably live and save some amount for retirement or other needs.
• Forty-six percent say they can get by every month but find it difficult to save and invest, for retirement or other endeavors.
• Thirty-two percent of respondents report that in the past year, withdrawals were made from savings or pension funds to make ends meet and reduced contributions of approximately 30% were made to a 401(k) or other pension or retirement fund.
• Sixty-four percent indicated their financial wellbeing was reliant on on their own actions, while nearly 32% said it was dependent on events usually out of their control, i.e., economic gyrations, employer decisions, an unexpected morbidity, or stock market fluctuations.
• Fifty-four percent reported their current financial position is either fair or poor, while 45% said it is good or excellent. Forty-two percent indicated they expected their personal financial situation would improve, and 46% felt it would become worse.
Social Security Is Only Part of the Solution
Many financial advisors project an individual will need about 70-80% of pre-retirement earnings to maintain a comparable standard of living when retired. In addition to social security benefits, an individual will most likely need to access additional income from a pension, stock and bond investments, an annuity, or savings to fill in the financial gap. According to the Social Security Administration, “If you have average earnings, your social security retirement benefits will replace only about 40%. The percentage is lower for people in the upper income brackets and higher for people with low incomes.”
Additionally, “For 65% of elderly beneficiaries, Social Security provides the majority of their cash income. For 36% of them, it provides 90% or more of their income. For 24% of them, it is the sole source of retirement income…. Among those aged 80 or older, Social Security provides the majority of income for 76% of beneficiaries and nearly all of the income for 47% of beneficiaries.”
Going It Alone
You are in charge of setting aside for your retirement. It is your responsibility to save for retirement whether covered by an employer’s pension plan, participating in a company sponsored 401(k) (hopefully maximizing an available employer match), self-funding a retirement plan, or saving in an IRA or Roth IRA. Making excuses due to lack of foresight or perceived lack of time to invest in your future should be indefensible.
Ultimately, retirement cash flow can be derived from invested savings and a systematic withdrawal plan or from living off interest and dividend income. One can also simply continue working, collect social security, or using a guaranteed lifetime annuity from an insurance company. If applicable, consider getting a reverse mortgage.
Given these sobering statistics, all individuals should seriously review their debt versus income ratios, reassess spending and saving practices, set realistic financial goals, and consider additional opportunities to make sure of adequate cash flow in post-retirement. Obviously, the earlier one begins a dedicated saving plan and reduces non-essential spending, the better. Consulting with a Certified Financial Planner is just one smart action step that can be taken to get you on the right path. Time can be your friend or nemesis; it depends on when you begin your journey. Your final pre-retirement destination should change from are we there yet to I have arrived!
A version of this article originally appeared in ChiroEconomics on April 15, 2015
H. William (Bill) Wolfson, DC, FICC, MS, MPASSM, CFP is a financial consultant and advisor and a member of the Dentist’s Money Digest advisory board. After passing the rigorous Certified Financial Planner examination, Dr. Wolfson obtained a Master of Science in Personal Financial Planning from the College for Financial Planning. He was subsequently awarded by the College a Master Planner Advanced StudiesSM. While in practice, as a doctor and fiduciary, care for patients was coordinated in a prudent, caring, proactive and diligent manner. This same approach is used with clients for their financial planning needs and concerns. Additionally, by accessing Dr. Wolfson’s network of financial professionals, clients have access to nationally known experts in the financial planning and investing arena. Dr. Wolfson retired after 27 years of active practice. He is a member of the Financial Planning Association (FPA), American Chiropractic Association (ACA) and New York State Chiropractic Association (NYSCA). Contact Dr. Wolfson at 631-486-2792 or firstname.lastname@example.org and view all his published articles at https://www.linkedin.com/pub/h-william-bill-wolfson/14/a55/226.