When I speak to clients, friends and family about retirement, I find that the biggest fear for most is the idea they could conceivably outlive their assets. Once you retire, the ability to add to your financial pool of retirement assets is significantly diminished. At this point, you can only hope that you’ve saved enough, and planned well enough, to ensure that what you have accumulated for retirement is sufficient to sustain your needs for the rest of your life. For some, this could (arguably) extend for the better part of one-third of their remaining life expectancy. For example, if one decides to retire at age 66, he/she faces the prospect of providing for themselves up to another 30 years (if their life expectancy extends into their mid 90s.) This sobering fact is probably the number one reason individuals are now considering the prospect of working well into their 70s rather than retiring between the traditional ages of 60 to 65.
So exactly how does one go about “planning for their retirement” when the period of time they need to plan could be approximately one-third of their life expectancy? Begin by monitoring your cash activity now. Although this advice may sound basic and fundamental, the devil is in the details. We may be able to obtain a general sense of what we spend each year simply by monitoring our deposits and disbursements in our checking/savings accounts. Identifying deposits are fairly straight forward; they typically represent the results of our investment and employment activities. Tracking our expenses may be a bit more challenging, especially those daily cash expenses that are made randomly and many times, impulsively. One may question why this isn’t a concern for us during our pre-retirement years. I would answer that we tend to feel content as long as we are able to pay our bills or can occasionally add some money to our savings account.
As one becomes more aware of monies spent, thoughts about “wants vs. needs” may begin to surface. Once we have categorized our expenses, we should then evaluate each expense as a want or a need. Simply tracking your monthly expenses for a short period of time (possibly as short as 3-6 months) can go a long way toward helping you understand whether or not you have allowed your wants to disguise themselves as needs. As the list grows, you will begin to identify categories of expenses that are within your control to either cut back or eliminate all together. Some expenses will be large, others small; however all of them ultimately impact your ability to increase the pool of assets that will serve as your retirement lifeboat.
Here are a few possible examples of a want disguising itself as a need:
- Saving for your child’s education: many of us would love to be able to fund 100% of our children’s college education; doing so at the expense of our own retirement may not be a tactically wise strategy, even if it is currently financially feasible. First and foremost, you want to avoid becoming a financial burden for your kids. Not having to pay back college loans is going to seem like less of a boon if mom and dad are living over the garage.
- Living only for today: this is a common mistake whereby we adopt a standard of living that is simply not sustainable in the long-term. Buying the new luxury SUV every three years instead of the reliable, standard issue sedan may seem to some a $40,000 difference in taste, but choices like these can have a considerable impact on one’s ability to incrementally save toward one’s retirement each year.
- Failing to re-examine monthly expenses: if you talk on your cell phone exclusively, when you are out and about as well as when you are home, is there a need to maintain your land line? If you routinely sign up for automatic billing of services, are you certain that you have cancelled all of the ones you no longer use? Are you spending $200 each month for a cable package that you rarely use because most of your time is spent out of the house?
If you decide you need to examine your spending habits in order to reach your retirement goals, monitoring your expenses is a good place to start. It’s also prudent exercise, even if you are already on track with your retirement; why spend money frivolously without getting some return on your investment? Again, in terms of retirement planning, this might equate to a small, yet important step. Once you have this information in hand, you can bring it to your trusted financial planning advisor, who can then help you begin the process of determining how much you will need to maintain your standard of living during your retirement years and ultimately how much you will need to begin putting aside today in order to make that happen.
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