4 Simple Steps to Meet Retirement Planning Goals
Retirement planning isn't easy, even when the markets are less turbulent than they have been for the last several years. One reason it's complicated is that the companies that do financial planning for a living make it that way, perhaps to stimulate demand for their services.
Consider these two series of commercials, something that's hard to avoid given how frequently they're aired. There's one that shows people carrying very large numbers around under their arms that represent amounts - arrived at God knows how - that the ads' sponsor calculates will provide comfortable retirements. The other series shows stern yet smiling advisors browbeating clients into toeing a green line, like a cop administering a sobriety test by the side of the road.
Kudos to Lincoln Financial Group for trying to make retirement planning a lot easier. The life insurance company issued a study last week proposing "a simple retirement baseline: 10 times pre-retirement income."
The firm identifies that nice, round figure as a rough estimate of the amount of investable assets that you'll need to maintain the same lifestyle in retirement. So if you expect to make $50,000 a year as your retirement approaches, then aim to set aside $500,000 and base your financial planning decisions around that goal. Here's a bit from the study:
Breaking the Ice
"The 10 [times] baseline can serve as a conversation-starter for retirement planning. This baseline is intended to be used as a starting point and as part of - not in lieu of - personal financial planning. Retirement income needs will vary from one individual to another. Therefore, individuals should work closely with financial professionals to determine whether 10 [times] or a different number - higher or lower - is the appropriate long-term goal for them, depending on their circumstances and investment profiles. Indeed, some individuals or families with greater income needs, relative to their investable assets, may want to aim higher."
This is an elegant way to begin to make a complex undertaking more manageable and less intimidating. There's more to proper planning, of course, as the study emphasizes, and it doesn't address some potential difficulties, such as the fact that many of us don't know what we'll make next year, let alone at the end of our careers.
The study does highlight one immense problem, however, by acknowledging that setting a goal and achieving it are two different things. A mere 11 percent of retired people surveyed on behalf of Lincoln Financial had attained the promised land of 10 times pre-retirement annual earnings.
The study offers some suggestions for entering the elite club. Some are obvious (and often depend on circumstances beyond one's control), but others are not.
Seek advice from a financial professional. Among 10Timers, the study found, 51 percent used professionals as their primary source of information and advice, while 12 percent never consulted a pro. For those who saved less, the corresponding figures were 28 percent and 32 percent.
Maintain an employer-sponsored or other tax-favored retirement account. You may be at the mercy of your boss on this one, but 88 percent of 10-Timers had a retirement account, compared to 55 percent of less well fixed retirees.
Save steadily, and augment savings with "power years." This is an especially interesting finding. 10-Timers were far more likely to have had periods where they ratcheted up their savings, especially when younger; 34 percent reported having such power years when they were in their 30s, compared to 11 percent of other retirees. In every age group, in fact, far more 10-Timers than others reported power years.
Have an investment strategy. The study selected three rudimentary investment approaches to ask retirees about - "picking mutual funds or stocks that performed well; managing asset allocation; riding the market or indexing." 10-Timers were far more likely to say that they had used one of these, by a margin of 62 percent to 23 percent.
A Windfall Doesn't Hurt
The study also found that 10-Timers were more likely than others to have inherited wealth, sold their home or other real estate or sold a business. That suggests that they were starting from positions of relative strength - higher disposable incomes, wealthier family backgrounds.
Obviously there is more to retirement planning than observing platitudes about diligence and thrift, but by being overly fussy and elaborate, the financial services industry can make the process seem doomed from the start. No surprise, then, that many people don't start at all or else wait until it's too late and then improvise instead of following a coherent strategy. Lincoln Financial concludes:
"Based on findings from real retirees who have achieved the baseline assets-to-income ratio of 10, the . . . study can serve to motivate positive behavior change among individuals who need to save more for retirement. Individuals should first determine their assets-to-income ratio and then take a proactive approach by implementing the four behaviors. Using this strategy, individuals can strive for incremental improvement that can be tracked in the years leading up to retirement."
