Making the numbers work
After you crunch the numbers, you may discover you need to save at a rate that isn’t doable. Don’t despair. You have the following options to lessen the depressingly high savings you apparently need:
Boost your investment returns. Reduce your taxes while investing: While you’re still working, be sure to take advantage of retirement savings accounts, especially when you can gain free matching money from your employer or you’re eligible for the special tax credit from the government. When investing money outside of retirement accounts, take care to minimize taxes. For more on investing strategies, see Chapter 7.
Work (a little) more. Extend the number of years you’re willing to work or consider working part time for a few years past the age you were expecting to stop working. Refer to Chapter 18 for more information regarding working during retirement.
Reduce your spending. The more you spend today, the more years you’ll have to work in order to meet your savings goal. See Chapter 6 to find out how to manage your spending in retirement.
Use your home’s equity. If you didn’t factor using some of your home’s equity into your retirement nest egg, consider doing so. Some people are willing to trade down into a less costly property in retirement. You also can take a reverse mortgage to tap some of your current home’s equity. We talk more about home equity and reverse mortgages in the earlier section “Your home’s equity.”
Dealing with excess money
When Eric was working as a financial counselor, one of his favorite parts of the job was going over the retirement analysis with clients who had accumulated more than they needed to achieve their desired lifestyle. Often, this was a surprise to the client, so some folks had a hard time believing the good news.
If you find yourself with extra money, the good news is that you can have peace of mind and more confidence about achieving your desired standard of living during retirement. In this situation, consider taking either of the following actions:
Enhance your retirement. We’re not suggesting that the only way to a happy retirement is to spend money, but don’t be afraid to enjoy yourself. While you’re still healthy, travel, eat out, take some classes, and do whatever else floats your boat (within reason, of course). Remember that come the end of your life, you can’t take your money with you.MONTE CARLO RETIREMENT SIMULATIONSWhen you start doing number crunching for retirement planning, you begin to realize that the outcome is dependent on many variables, which we discuss in the “Understanding assumptions and how they work” section in this chapter. In addition, other factors, such as how investment returns change over time, can have a significant impact, especially over the short term, on your retirement plans.Over the past century, the rate of inflation has averaged about 2 to 3 percent per year. Growth-oriented investments, such as stocks, have returned about 9 percent per year historically. Bonds and other fixed-income investments have returned about 5 percent per year.Those are long-term averages, which are all well and good, but suppose a worker decided to retire around the year 2000, and, like most retirees early in their retirement, he still had a healthy chunk of his investments in stocks. Because the stock market experienced severe downturns both early and late in the 2000s, his standard of living and ability and comfort with taking withdrawals from his retirement funds may have been impacted.A Monte Carlo simulation runs many different scenarios and calculates the likelihood (percentage of the time) that you will accomplish your retirement goal. The T. Rowe Price retirement calculator we walk you through in this chapter does Monte Carlo simulations and tests about 1,000 market scenarios to see how your retirement plans will work out in many different market conditions.
Earmark a portion of your assets for your beneficiaries. You may want to leave something for your family members as well as other beneficiaries, such as your place of worship and charities. If so, you need to determine the approximate dollar amount for each of the beneficiaries. Estate planning is so important that we devote Part 4 to it.
Making Plans for Nonfinancial Matters
Although our focus in this book is clearly on all matters financial in your senior years, you should know that we take a holistic approach to your finances. Getting bogged down in the climb up the career ladder, burning the midnight oil, and accumulating wealth and possessions is easy in a capitalist society. In your pursuit, losing sight of some areas — the ones not about money — is also easy. These areas are just as important as — if not more important than — your finances, which is why you should be working just as hard at planning them. That’s what we discuss in this section.
Personal connections
A lot of research shows that those individuals who have strong and healthy connections in their later years tend to be happier, enjoy better health, live longer, and live longer independently. As you’re preparing for retirement, make sure you spend time making and maintaining healthy personal relationships. Doing so is an investment that pays dividends by improving the length and quality of your life.
Personal health
Your health is much, much more important than your financial net worth. Just ask folks who have major medical problems — especially those they could have avoided — if they wish they had taken better care of their health. Although anyone can experience bad luck or bad genes when it comes to health, you can do a lot to stay healthy and enjoy enhanced longevity and the best possible quality of life. Chapter 2 can help you take action and plan ahead for health.
Activities, hobbies, interests
For folks who have had full-time jobs, retiring and having no job to occupy their days sounds alluring. However, some retirees feel a lack of purpose and miss the satisfaction that comes from meeting the challenges of work. A fringe benefit of most people’s work is the human interaction that comes along with it.
Activities and hobbies: Exercising is a good choice to include in long-term plans; it provides vast health benefits and opportunities to meet new friends and hang out with old ones. If you’re not into exercising, perhaps you can look at different hobbies you like, such as collecting something. You can meet interesting people and make new friends by going to auctions, garage sales, and such. People like to collect all sorts of things; just be careful you don’t spend too much