By Jon L. Ten Haagen, CFP ®
Setting realistic expectations is a great start toward a satisfying retirement.
To get started, you must have a road map of what you are spending for all aspects of your life, both for everyday expenses and for the outside activities. The best way to get going in the right direction is to create a budget and balance sheet. How much you are spending vs. how much you are earning.
Most financial ‘experts’ feel you will need 70 percent-80 percent of what you are earning now to live in retirement. I’d like you to aim for 100 percent and settling for less if you have to. This is a very simple way to look at your future needs, however it is a start. So, what are my expenses now: utilities, insurances, clothing, school costs for the children, heat and air conditioning, home repairs and updates, taxes, etc. You know you will be paying these bills each month.
There are a few more things to keep in mind. At retirement hopefully your mortgage will be paid off, you will not be spending money to get to and from work, hopefully the children are grown up, finished school and are on their own, you will stop paying into social security and with a lower income you will be paying less income tax.
Now, what are the possible additional fees facing you at retirement? Perhaps trips to a warm climate each winter, medical expenses, hobbies. You perhaps have been planning that dream vacation for years and now is the time to take it. I am sure you can think of a couple more costs coming your way.
There are always expenses coming up in your working days and after. The best way to address these hidden costs is to create an ‘emergency fund.’ An amount of money to cover nine months of living expenses; I want to see more coverage as you get closer to retirement. Think of 2007-2009 and the hit investment portfolios took. An emergency fund made up of income generating short term investments in fixed income will not fluctuate anywhere near the equity markets, so you can be taking living costs from the emergency fund while your equity investments have time to recover before you need them.
This is the concept of protecting your long term investments and for the most part it has worked well over the long term. Best to discuss this with an investment professional, a Certified Financial Planner (CFP).
One way to help you get to a comfortable retirement is to invest in long-term vehicles. First consider your company retirement plan (401k, 403b, 457), then consider an IRA or ROTH IRA for additional investments. It is suggested you put away 10 percent-15 percent of your income right off the top. If you are not in a position to do that now; start with any amount to get going, otherwise you are likely to say, “I will get around to it later.” Later almost never gets here! Now, plan that at the end of each year you increase the percent you put away by 1 percent, 2 percent, and 3 percent – whatever you can afford – until you get to 15 percent. Remember, you are the first bill every payday.
Now, let’s look at what it will cost you to live in retirement. Add up all your income and your expenses then figure a rough idea of your retirement costs. How much do you have saved now? How many years of earnings do you have before retirement gets here? What is the rate of inflation now? What is a realistic return on your current investments after adjustments for inflation and taxes (if any)?
These are just the very basics of how to determine what you will need and if you might have to save a little more and work a few more years before retirement is possible.
Once again, we are here to help you. Please use us as a source to get you on a fast track to a comfortable retirement. Have a great month.
Huntington’s Jon L. Ten Haagen, CFP, runs Ten Haagen Financial Services, Inc., a full-service independent financial planning firm, and he is here to answer your questions. In this bi-monthly column, Ten Haagen will answer your financial questions and help you with his expert financial advice. Don’t be shy, our expert is here for you, so feel free to ask away! Email your questions to email@example.com today, and let our expert help you.
*Ten Haagen is an Investment Advisor Representative offering securities and advisory services offered through Royal Alliance Associates, Inc., member of FINRA/SIPC, and a registered investment advisor. He is also an active community member, serving on several nonprofit boards and as executive officer of the Greater Huntington Boating Council.
**BACK IN HUNTINGTON: The offices of Ten Haagen Financial Services, Inc. have moved back to 191 New York Ave., Huntington. Friends and clients are welcome to stop by, check out the new office and share a cup of coffee with the expert!