Seven Things You Need to Know to Plan for Retirement
Now that many people feel the economy is heading towards recovery, it is a good time to check up on your retirement plan. The biggest fear among investors is that they will not have enough money for a secure retirement and in the past year, many people took a significant hit to their retirement account. If you are a business owner, you’ll need to take additional steps to ensure your retirement savings are safe. For example, keeping adequate working capital for inventory purchases, equipment replacement and upgrades, payroll, etc. will allow you to leave your personal assets intact. It’s important to segregate business assets from personal assets.
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You can make sure your retirement plan does not fall short by steering clear of common pitfalls. These are the comments
I hear most frequently in my professional practice from business owners and individuals:
- "I don't know how much money I will need in retirement." Most people have no idea what they spend or where it goes. They think they'll need less when they retire, but even with some reduced expenses, the cost-of-living continues to increase. Don't forget that your retirement income needs to provide cash flow for more leisure time activities and a cushion for inflation, especially in healthcare costs, throughout your life. Work with your financial planner to calculate a retirement income that will work with your lifestyle and budget.
- "I don't know my own net worth." Add up the value of all your assets, subtract your liabilities and project their growth to your retirement. Count your home, value of your business, retirement plans, IRAs, savings, and cash value of life insurance. Add up all of your liabilities. Include your credit cards, car loans, mortgage, etc. ASSETS – LIABILITIES = NET WORTH
- "I don't need any other savings besides retirement." Retirement planning is life planning. You should have a short-term emergency fund of 6 to 12 months' living expenses, (or more depending on your situation). If you have an extended illness, irregular business income and/or uncollected accounts receivable you may need to increase your short-term savings. Midterm savings, for goals out 5 to 10 years, should be established for major expenses like replacing your car or home repairs. Appropriate planning will help you to avoid consumer debt or raiding your retirement funds in the future.
- "I should have started sooner. It's too late." Start investing for retirement now; it's never too early, and it's never too late to improve your bottom line. I had a client that started working with me when he was 65. He died at age 80. Due to planning, even as late as it was, his widow has an investment portfolio and a home to live in.
- "I'm young. Retirement can wait." Investing in your business is likely your best investment, yet many businesses fail to diversify. Economic downturns teach us that assets outside of your business are essential. The most valuable asset is time—so start early. The law of 72 gives you a formula for how long it takes to double your investments. Take your return and divide by 72. That's how many years it will take to double your base assuming a fixed rate of return. For example, 72 divided by 10% return = 7.2 years. If you only earn a 4% return it takes 18 years to double your base. If you invest at age 20 and retire at 60 you have 40 years. If you wait until age 40 you only have 20 years. If you haven't started investing for retirement now, do it.
- "I have too many bills to start this now." Clear the money-eating termites out of your financial structure. People often carry tens of thousands of dollars worth of consumer debt at an 18 to 20% interest rate, as well as car loan debt. Address your debt now so you can work on reducing the interest rates and on eliminating your consumer debt. Just think how much more you can save, and how much further your retirement income will go if you have no debt. Properly structuring the amount, term, and type of debt is essential.
- "I don't know how to begin." Work with your financial planner to begin or update your investment plan. If you have a 401K or SIMPLE IRA plan with matching contributions, be sure to at least take advantage of the company match. Your financial planner can tell you about other kinds of savings that have tax advantages and may work for you. How early you begin, how much risk you are willing to assume, your age, rate of return, years to retirement, and knowledge will determine your success.