Editors' pick: Originally published Dec. 1.
As to-do lists go, this is one you might not want to ignore.
Or at least that's the case if you have designs on retiring someday.
And the good news is that there are just seven items on this to-do list, according to Michael Falk, a chartered financial analyst, a partner at Focus Consulting and author of Let's All Learn How to Fish . . . to Sustain Long-Term Economic Growth.
Here's what Falk suggests that you do to prepare for a successful retirement.
7. Plan way ahead. Seek counsel from a qualified, fee-only financial planner or advisor no less than 15 to 20 years prior to your expected retirement. Why that time frame and why from a fee-only planner? "Starting in one's late 40s savings accumulations have become more differentiated from the average age cohort, retirement is less than a distant goal and getting on a good path early on can really compound in your favor," Falk said in an interview. "Fee-only - as in hourly/annual retainer fees - is less conflicted and lower cost than other forms of fees which can be quite substantial costs on significant savings."
What if you're less than 15 years away from retirement? Is it still worth seeking counsel from a planner? "Absolutely, less time doesn't mean no time; all it takes is one mistake to derail a lifetime of solid planning/decision and planning is not solely to retirement, but needs to be through 'that day,'" said Falk.
And what should you look for in a planner? "Certifications are table stakes," Falk said. "Good listeners versus talkers is important, and listen for good (challenging) questions. Look for specific experience with retirement topics not just investments, and check references and the regulatory websites for potential past reports." Of note, Falk said that's just a very brief overview of what to look for in a planner.
6. What will you retire to? Think first and foremost about what you will retire to. "If you cannot answer this question and will only be retiring from something, stop and think about what is next before you begin to plan your retirement," he wrote.
Why is this the case? "Retirement is not just a destination, but a change in one's life," Falk said. "What lifestyle will you be living? What will you be doing? For too many, retirement is the finish line of what they were doing -- an escape -- versus about what's next. If you don't know where you're going... how will you know if you ever get there? Or, more pointedly, if you don't know what you will be doing, then why get out of bed? I wrote about the health risks around that date as well as the boredom risks too."
Falk also cautions against retiring until you and your spouse or partner agree on what you're retiring to. In fact, he suggests that marriage counseling might be one of the wisest investments prior to retirement, especially since the divorce rate in the U.S. is twice as common among those aged 65 and older as it was in 1990. "The loss of half of one's savings would make most retirements difficult to finance," he wrote.
Falk also cautions that retirement can be bad for your health, and that it might be wise to make sure you have active interests, relationships, and a purpose before you retire and that you're able and prepared to pursue those interests.
Finally, he cautions against retiring if you don't have income to fund your basic lifestyle. "Know that retirement is easier to finance when delayed until your safety net is maximized," he wrote. "Incentives for postponed retirements are sensible."
5. What are your individual financial circumstances? Don't fall victim to using rules of thumb and formulaic approaches to your retirement plan. Those rules and approaches don't take your personal circumstances into account.
To be sure, a financial advisor/planner will custom-tailor a plan based on your individual financial circumstances. But at a minimum, Falk recommends that you save (and start early), diversify your investments, and create a spending plan (see below).
4. What is your spending plan? Your spending, according to Falk, has two parts: fixed (or what some essential) expenses and aspirational (or what some call discretionary) spending. He recommends reviewing your current budget and doing the following:
- Deduct all expenses that will be gone when you retire. That might include retirement plan contributions, employment taxes, work-related costs, mortgage payments and the like.
- Add in an estimate for out-of-pocket health care costs (copayments, deductibles, etc.) and count them as a fixed expense, even if the expense will be variable.
- Next, split the remaining expenditure estimates into fixed and aspirational columns. Note, Falk wrote, that certain expenses, such as food, can be both fixed and aspirational and should be split. "Always and everywhere, the smaller your fixed expenses, the easier it will be for you to retire," Falk wrote.
Once you do that, Falk recommends that you "immunize before you (try to) optimize." Immunizing simply means making sure your fixed (my word, essential) expenses are covered by guaranteed payments, such as Social Security and pensions. Immunizing also means, according to Falk, that you can theoretically invest any residual saving in any way desired, regardless of volatility. "With immunization, your retirement is safe for as long as you live and mostly independent-other than health care shocks-from whatever happens in the markets," he wrote. Plus, Falk noted that immunizing reduces sequence risk, the risk of having to sell investments during a bad market cycle.
If, however, your fixed expenses are more than your guaranteed sources of income, then Falk noted that you could purchase an annuity or laddered bond portfolio with your savings to shore up the gap. Falk also suggests that you might want to consider how you might monetize assets such as your home. That might include, for instance, a reverse mortgage.
Falk recommends letting the investment results from your invested residual savings feed your aspirational (discretionary) expenditures. "In strongly positive investment years, you will eat even better," he wrote. "In less positive years or down-market years, your expenditures should be on a diet."
An unfortunate reality, Falk wrote, is that too many people have fixed expenses that are too large a percentage (more than 50%, for example) of their total expenditures and have yielded control of their lifestyle to the vagaries of investments.
3. Recognize the trade-offs and risks. Retirement planning is all about trade-offs, according to Falk who notes in his book that if your path toward retirement will not get you all the way there, then you have four trade-offs from which to choose:
- You can start to save more (live less) today;
- You can plan to work longer and delay retirement;
- You can plan to retire on less; or
- You can take more risk with your investments (and hope for the best) versus saving more.
Those actions are not, however, guaranteed to work. For instance, planning to work longer doesn't mean that you'll be able to, Falk wrote. Also, taking on more risk with your investment is not guaranteed to produce greater results, either. "The good news is that the four trade-offs can be combined to really further your path, for example, save a bit more and retire a bit later," he wrote.
2. Consider part-time work. Falk recommends that you consider part-time work if your savings if your savings and desired lifestyle numbers do not balance particularly well (or if you simply want some of the pleasures of work and its social aspects).
Among his suggestions:
- Work where you spend money. "The discount can only help," he wrote. "It is even better if the work connects with a hobby or interest. For example, golf course employment could allow for free rounds."
- Income from this work could delay all needs to purchase any immunization products, and you may want to save such purchases for when there is a full retirement, Falk wrote.
1. Prepare your documents and your family/friends. In his book, Falk also recommends that you execute your "papers" and communicate your wishes with friends and family. "At a minimum, provide your attorney's contact information with instructions such as 'in case of such-and-such happening to me, contact Mr./ Ms. X,'" he wrote.
Your papers should include, he noted, a will, a health care power of attorney, and a power of attorney for property and other financial transactions. Also, Falk recommends that you make sure that you discuss with family members (and document the discussion) your desires and expectations for assistance if and when you may need their help.
And lastly, Falk recommends drawing up specific instructions for dealing with concerns about your cognitive functions.