When it comes to New Year’s resolutions, the one you make about retirement could be the most important of all.
It’s New Year’s resolution time again.
Every year around the holidays we think about what our resolutions should be for the coming year. For some, it’s committing to exercise more so they can lose weight. Others want to give up smoking. Some use it as a bucket list to do something they’ve always wanted to do.
For those of us over 50 who are closing in retirement, we should make one resolution that helps us attain the goal of being prepared for when we quit working.
Retirement experts says the resolution we should make and keep in 2015 is creating a plan. Most people haven’t saved much for retirement, and most won’t be ready except for their Social Security. Don’t be one of them.
Yes. That’s all. It sounds simple but it’s not executed by many.
“You must know exactly what you’re going to need for retirement,” says Melody Juge, founder and managing director of Life Income Management based in the Carolinas. “But people don’t do this. They need to know how much they’re spending because they’re planning for 20 to 40 years with no earned income coming in.”
Juge says your retirement is funded with unearned income. When you’re working, you can manipulate your budget, but when you have a fixed amount of money coming in every month, you need to know exactly how much you can spend.
“I know it sounds very unsexy and I know it sounds simple and boring but the key to retirement is creating a plan and a plan starts with knowing how much money it costs you to live. You have to work backwards. Everything else in life you work forward. You have a goal. Retirement planning is the opposite.”
The plan has to be divided into two categories, Juge says. One is for your basic living expenses and the other is for your lifestyle enjoyment, which can include dining and entertainment, she says. If anything happens to the economy, you can adjust accordingly.
The problem people have with retirement planning is that when you’re looking down the road 20 to 40 years, everything is a big question mark, Juge says. But most people don’t even try to figure out what they might need.
“I have not met one person in 30 years that knows how much it costs them to live until they actually tackle it,” Juge says. “People say it costs me about $5,000 a month to live or it costs me $3,000 a month or it costs me $7,000 a month. You have to know how much it’s costing you to live because you have to have an emergency fund and then you have a certain amount of cash on hand to fund your basic needs. I like to plan it for the first year. I have had people that want to plan it for three years.”
The problem starts when people attack retirement based on how much money they have. If they have $450,000 in their 401(k) and their grandmother left them $100,000, they are counting on their investments, she says.
You have to growth and you have to have guaranteed income. You also have to have emergency money, Juge says.
“Growth comes from the market. You can talk all day long about equities and annuities. I am here to tell you that those returns they talk about in annuities are few and far between,” Juge says. “You want an annuity to support a guaranteed income. Done. That’s what you want. If it’s going to cost you $4,000 a month, and you’re going to get $2,300 a month for Social Security, you need $1,700 a month coming from somewhere else.”
If you have $450,000 in your 401(k), you can take $200,000 and buy an annuity that will give you $1,700 a month for life, and then take the other $250,000, invest $200,000 into a managed portfolio, Keep $50,000 in cash for emergencies, Juge says.
“Imagine you are 65 to 70 years old and you’re healthy and you’re planning for 20 to 30 years,” Juge says. “There’s going to be a lot of surprises and having enough money to weather those surprises is very important. You have to have growth in retirement and you have to supplement your Social Security.”
Juge says no one wants to stop all of those wonderful lifestyle perks, but if there’s a problem in the economy or if we have a crisis as a country and we’re 78 years old, you will know exactly what you should do and what you should cut out.
That means needing to know that you will have plenty of money for food, your phone bill and your health care deductibles.
“You know that you can’t play golf five days a week and you might have to play three days unless you play on a public course,” Juge says.
In retirement, people are working from a position of emotion because feeling good about yourself is important, Juge says. The unfortunate issue about retirement is as people age, they forget and their health deteriorates and they ultimately die.
“Retirement is when you have to be really clear because you want to enjoy your life to the maximum because there isn’t anything after this,” Juge says.
Juge says preparing for retirement means not needing to spend $120 a month on expensive coffee.
The problem is we don’t live in a society where people are attached to money. Juge says. We don’t get a pay envelope. Everything is done electronically. There is an emotional disconnect, she says.
“In the old days when my grandparents were working, they got a pay envelope and it had cash in it and they took it home and the first thing they did was take 10 percent out for their savings,” Juge says. “If there was enough left over and if one of the kids needed shoes, they got shoes. If there wasn’t enough left over, they used cardboard in the shoe. They didn’t go into their personal savings. These are people who went through the Depression.”
Juge says we should heed their advice. That doesn’t apply, however, to the cardboard in the shoes. Duct tape works.