I get questions all the time about saving for retirement. Clients ask:
- How much should I be setting aside each month?
- How big of a ‘nest egg’ do you think I’ll need in order to retire comfortably?
- Will Social Security run out of money before I’m 65? Should I even count on that?
- What mutual funds or investments will grow my assets most over this next decade?
Those are all good, interesting questions. But they’re not the questions I recommend you ask first.
Let me give you six better ones to ask when saving for retirement.
1. Why am I saving? The #1 question to ask about retirement saving is “Why?” Why would I voluntarily give up enjoying my money now?” (a practice referred to as “saving”).
Most would answer, “Well, that’s just what you do, right? You set aside as much money as you possibly can so that one day, hopefully, you’ll have the resources you need to stop working.”
Few, however, think to create an actual plan for those assets. How will they use them wisely? How will they turn shares of stock into groceries? How will they make sure those limited resources last?
A better answer to this important question? “I’m saving to get the assets I’ll need to produce the income I want—in retirement, when I’m no longer getting a paycheck.”
Can you see the difference?
Building up a big account value in your 401(k) or Roth IRA is certainly a part of the equation, an important first step. But it isn’t the final answer. Retirees don’t live off large retirement account balances.
They live off income streams.
(Don’t believe it? On your next trip, just for fun, try checking into a hotel by flashing your latest annuity statement or announcing your net worth. See how that works for you.)
2. How much retirement income should I aim for? I don’t know about you, but I’d like to retire with no decrease in income (if that’s possible). What’s your current monthly budget? Shoot for that.
3. How long should my money last? Well, at least as long as you do. And if you’re married, as long as your spouse lives. In other words, you want your income to last at least as long, if not longer, than you do.
4. How secure should my retirement income be? Consider: If the financial markets, or business markets or real estate markets get shaky or go in the wrong direction, do you want your regular income to be subject to that? Just how shielded do you want your income to be from external economic forces?
5. Will I need money in addition to my income? Probably so. Do you think your roof will ever need to be replaced? How about your car? We all face unexpected expenses during our working years. What makes you think that your need for liquid (i.e., available) funds will go away in retirement?
6. Do I want to leave anything after I’m gone? Unless you go broke, it’s hard not to. But many people have a desire to leave a financial legacy after they die. If so, make sure that is part of your retirement income plan.
I hope the above questions make you realize that while saving for retirement is necessary it’s not enough. It’s not even enough to invest…even very successfully.
What you need is a plan – for retirement income, liquidity and legacy.
Do you have one?
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