Most people refer to their retirement savings as their “retirement nest egg”. In theory that’s the money that is made up from the many sources of retirement income, the many eggs you should be socking away so that when the time comes, you have those eggs to “cook up” a great retirement. I say “should” because reality is that an awful lot of people are leaving their cupboard bare and for a million reasons are not preparing for retirement at all. In fact, I am ashamed to say I have friends and relatives who are in their prime earning years and still have not saved a single penny for retirement!
So much for having a very sage financial blogger in your inner circle!
You may have ignored retirement when in your 20’s or 30’s, but when you are still saying “la, la, la, la, la” about it in your 40’s and 50’s, you are in a boat that is sinking fast. So right now is a good time to take a good hard look at your retirement nest egg and start bailing!
Counting on Social Security, Are You?
Even if Social Security is what you are planning to be your source of funds for retirement, exactly how’s that going to work for you? It’s not as simple as just snapping your fingers and you start drawing that retirement income and all of your previous bills and expenses magically get taken care of. It doesn’t work that way.
If Social Security still exists and is in the form it is in now, you will get a check based upon what you’ve earned while you worked. That amount will be a fraction of what you earned, with a maximum that for many is nowhere near what they are used to getting. And there’s a good reason for that. Social security is designed to “supplement” your retirement income and was never intended to be the main source of your retirement funds!
Exactly when you start taking Social Security benefits makes a huge impact on how much Social Security funds you will get every month for the rest of your life (with adjustments for cost of living, COLA, smattered in there in small doses). Just check and see how much difference it makes when you begin drawing funds at age 62 (the first year you can do it) versus age 70 (the last year you can benefit from waiting). It’s a mind blower.
The Status of Social Security
Social Security is in financial trouble and is likely to suffer some changes in the future. I have no crystal ball, but for the past 30 years or more, I have been hearing about the money evaporating at some point in the Social Security pool and that changes must be made to benefits or there will be cuts or even no Social Security if we don’t do something about it!
Well, that time to do something is now upon us and so far we are still ignoring it. That’s why building your retirement nest egg with as many other sources of funds as you can is so damned important!
The List of Retirement Options
As Americans, we have many options to choose from to save for retirement. Having only one or two eggs doesn’t seem like nearly enough to make a good retirement “omelette”. Besides Social Security, we also have:
- Tax-sheltered retirement plans
- Tax-free retirement plans
- Employer or government employer-funded pension plans
- Company profit-sharing retirement plans
- Insurance products: Fixed-indexed annuities, whole life insurance
- Certificates of deposit (CD’s)
- Investment portfolios
- A “side hustle” or part-time job to earn income from something you love to do
- Real estate equity (home ownership)
The above items are assets, not only in real dollars and cents, but in the security of a solid retirement plan. However, even if you have multiple retirement “nest egg” options, you will also need to know how taxes will impact you this year and every year after your retire.
All these types of retirement savings options have different rules on taxation and when they can be withdrawn without penalty. Delaying Social Security, while taking withdrawals from other taxable retirement income sources, can greatly impact your income. For this reason, a retirement portfolio must be adjusted and monitored, and a plan developed for withdrawing from each income source and its taxation consequences. These make financial planning throughout retirement even more critical.
The “When to Start Planning?” Question
I have written this answer over and over again and so many people think it isn’t reality, but let me try again. The time to begin preparing and planning for your retirement is the day you start your very first job!
Why? Because you can, and if you do, it extends the timeframe that allows your money to grow and grow. Fifty years of growth means a lot more money for you than 10, 20, or 30 years, and by an enormous amount.
There’s also the “risk factor” to consider. Here is a fact: You can take more chances with your investments and retirement funds when you are young than when you are closing in on retirement simply because time is on your side and any downturn in your nest egg has time to recover. When you are still decades away from retirement is the only time that mistakes can be corrected!
Other Retirement Options to Consider
You will want to be able to decide the lifestyle you will have when you stop earning a weekly paycheck and retire. You will want to, but if you are not prepared, that lifestyle will not be the one you want. Your retirement nest egg will be a main factor in where you live, what you will drive, and what your leisure time activities will be. What you want and imagine may not be what you can afford unless you think about all of it way ahead of the events of retirement.
Is it all just simple and cut and dry? Of course it isn’t. There are many things that can inhibit you like the debt you have accumulated (holding a mortgage in retirement is just one of these no-no’s) and then there’s your health and healthcare costs and others to be concerned about, too. But that doesn’t mean you can’t get ahead of the curve with good financial planning early. In fact, it means you can get a pretty good start.
Financial planning before retirement is about accumulating assets now and planning how to use them later in your future. Once you are retired, financial planning focuses on making your retirement nest eggs stretch and last and outpace inflation. Planning draw-down strategies, tax consequences, and estate planning are also key factors. That’s the reality of the challenges you will face and that’s the reason you have to think about them right now, while you are younger or no matter what age you may be.
Where are you now on planning for the retirement road? What are you doing now that will ensure you get the retirement you really want?