Living Longer Requires a Bigger Nest Egg
Lengthening life spans, improved health care, and a growing emphasis on the well-being of massive numbers of aging baby boomers means your post-career years should be long and active. Even if you decide to adopt a part-time retirement job, your nest egg at retirement must be large enough to live as long as you do. The importance of building a healthy nest egg has never been greater.
Full Account
Don’t let the complexity of retirement plan rules—or anything about your finances—intimidate you. You’re not stupid. It may not be easy, and it’s not always fun, but you’re up to the challenge, and the rewards are worth the investment of time and energy. If it were easy and fun, we’d all be talking about it every chance we got; the benefits of this new obscure tax law or that new investment strategy would be the hot topic of conversation at every weekend cookout. Let’s face it: we need to understand how to protect our retirement plans because we live in a new world. Your financial security is now more on your shoulders than at any time since before President Roosevelt’s New Deal, so don’t be afraid or reluctant to ask a professional for help. I’ve worked with all sorts of brilliant clients over the years—engineers, teachers, researchers, executives, scientists, and even other financial planners. They weren’t shy about asking for advice, and you shouldn’t be either. If nothing else, you’ll learn important financial lessons and become financially secure more quickly.
M&Ms: Staying on Track
Life is hectic, and there never seems to be enough time to get through those ever-growing to-do lists. It’s easy to lose sight of the big picture and let some of the financial planning, such as investing and creating retirement accounts, take a backseat to paying monthly credit card bills and daily expenses. But don’t do it! Make retirement planning much easier by making it a regular part of your monthly money meetings.
Monthly money meetings (we call them M&Ms) are an important part of keeping your finances on track. Plan a monthly financial review with your spouse or partner, and involve your children in the meetings as well. Children need to feel financially connected as young as possible and gain a sense of sharing the financial responsibilities with their parents. If you’re single, you’re not off the hook. Regular M&Ms are important for everyone because they keep your finances top-of-mind and your goals on track.
M&M Checklist
In your money meetings, review and update your financial and retirement goals. Some things you can check and discuss each month, and others you should review periodically throughout the year.
In each monthly meeting:
• List your income and expenses.
• Discuss upcoming expenses and long-term spending goals.
• Decide whether the cash allowances you’re taking are enough to cover entertainment expenses and extras.
With most couples, one person pays the bills, and the other person is less involved in the family finances. Monthly money meetings keep both in the loop and give each person a chance to discuss finances in an unstrained, structured atmosphere.
Each monthly meeting is part of a financial season—or fiscal quarter, if you’d rather think of it that way.
By following M&M seasons, you’ll be sure to review all the parts of your financial plan each year. Here is how you can break out the seasons:
Winter: First quarter of the year
• Tax planning, part I—Gather your tax information for your tax return.
• Budget planning—Check the expenses from last year and make sure you’re not spending more than you’re earning, receiving from pension or Social Security, or that you can afford to take from your nest egg.
• If you’re retired and have Social Security or pension income, review the payments you expect to receive this year and decide how much you should be taking from your retirement nest egg each month as income (see Chapter 12).
• Investment planning—Check year-end reports and decide if you need to change any investments. Check the asset allocation of your portfolio and rebalance if you need to.
Spring: Second quarter of the year
• Tax planning, part II—Decide whether you need to make any changes to your withholding, estimated tax payments, or investments based on the results of your tax return.
• Credit, debt, and ID theft protection—Check your credit report from one agency. If you’re working on paying down debt, decide whether you want to continue on the same payment schedule or add more to the principal to retire the debt faster.
• Insurance—Review your insurance policies and make changes as needed.
Summer: Third quarter of the year
• Estate planning—Check your estate plan and beneficiaries to see if you need to change anything.
• Credit, debt, and ID theft protection—Check your credit report from another of the three credit reporting agencies. Change the passwords on your online accounts.
• Financial planning—Review your financial goals and update your retirement and financial plan. Read a financial planning book or one on investing.
Fall: Fourth quarter of the year
• Tax planning, part III—Check your year-to-date income and see if there are any year-end tax-planning tasks you should consider. Check-in with your tax accountant for help.
• Investment planning—Check your investments, and decide whether to rebalance and harvest any capital gains.
• Charitable giving—Plan charitable giving for the year.
Nest Eggs
There are three credit-reporting bureaus, and each owes you a free report once every 12 months. Go to www.AnnualCreditReport.com. Remember the report is free; the site may try to sell you your credit score and credit monitoring, but all you need is the free report.
Feeling Secure
Protect your retirement accounts from one of their biggest enemies: you! Avoid living on your entire paycheck. Let the magic of long-term investing and compound interest work for you by always saving part of your pay. Saving some of your earnings toward emergency cash and part of them toward retirement will not only ensure that you’ll feel financially secure from month to month but will also help keep your lifestyle from outpacing your ability to afford it in retirement.
Compound interest is interest that is paid not only on the principal you have saved but also on the accumulated interest from prior periods that you have not withdrawn.
Your retirement income will probably include Social Security and/or pension income; income from investments; and withdrawals from your savings and retirement plans. Many people, and an increasing number at that, also choose to work at least part-time in retirement, adding earned income to the mix as well. Part of protecting your retirement accounts will be to create this multi-part stream of income sources. It will be easier to manage your taxes in retirement if you have the added security of investments and savings outside of your retirement plans as well as pension or Social Security income and part-time work.
Many people make the mistake of not contributing to their retirement plans or contributing too little because they expect an inheritance from family to fund their retirement nest egg. Inheritances are sufficient retirement nest eggs for only a very few. Many people who expect inheritances are stunned to learn their relatives spent all or most of their supposed bequest on their own expenses, such as medical care, or that the inheritance was much smaller than hoped, if it ever existed at all. Relatives are often uncomfortable talking about money. Don’t count on an inheritance funding your retirement unless you have had enough discussions with your family members and their financial advisors to be absolutely sure. Retirement is not something you can guess at and then redo when your assumptions turn out wrong.
What’s more, people often underestimate the amount of money needed to retire. A parent may honestly believe he is leaving a plentiful inheritance to his children and may tell them so. Without knowing the specifics, it would be foolish for heirs to bank on it.
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