Elderly people hail from all walks of life and income levels, to belabor the obvious. However, there are some basic steps and tools available to assist a person in early adulthood (aged 18 – 30) in planning for financial security in retirement years. If anything, there are too many voices “out there” touting one path or another.
Fortunately, experts outline a basic, understandable, common sense approach to financial planning for retirement security. A young adult has the benefit of decades for planning retirement and can take full use of these steps/tools.
The first step is to calculate anticipated rudimentary retirement expenses, plus enjoyment expenses, adjusting them for inflation as accurately as possible. Rather than blindly hoping that all basic expenses will be covered by whatever income will be available, the person should literally list basic life expenses and adjust them for inflation as of his/her retirement age. Those expenses would include: mortgage/rent; utilities; home maintenance; transportation, private and public; groceries; clothing; taxes; insurance premiums for home, car and medical care. The individual can probably best draw up his/her future list by listing his/her current basic expenses In addition, he/she can use a sample expense sheet such as one provided by Vanguard here: https://investor.vanguard.com/home/?WT.srch=1 Once the person has totaled his/her anticipated expenses in retirement, he/she should add sums for activities that he/she would occasionally enjoy, such as vacation trips and hobbies. After totaling basic and enjoyment expenses, he/she must calculate the impact of inflation on that total. A good, simple inflation calculator is offered by InflationData.com here http://www.inflationdata.com/ to give a good “ballpark” estimate of the monthly amount that will be needed for basic expenses in retirement. Depending on the number of years the person intends to work before retiring, the total adjusted for inflation could be shocking.
The second step after totaling anticipated expenses and adjusting them for inflation is to determine how all these expenses will be funded. Social Security retirement benefits may cover at least some of the expenses. The Social Security Administration offers a calculator to estimate retirement benefits here: http://www.ssa.gov/retire/estimator.html Many people will need an additional source of income through work or independently. After subtracting estimated Social Security retirement benefits from the total anticipated expenses, the person will have a reasonable idea of the additional income needed to fund all expenses unfunded by Social Security. At that juncture, the person is ready to determine the other sources of funding.
The third step is to find a financial planner, through work or independently. Apparently, there are thousands of financial planners, some good and some bad. Choosing the right financial planner may involve interviewing several of them and asking key questions, such as: the experience he/she has; their educational credentials; services offered; approach to financial planning, neither too aggressive nor too cautious; types of clients with which he/she usually works; whether he/she is the only financial planner who will be working on the plan and, if others will be involved, their names for background checks; how he/she will be paid; the typical charge for his/her services for this type of planning; any conflicts of interest in which someone else might gain from the financial advice he/she gives; who regulates his/her profession and whether he/she has ever been disciplined for unlawful or unethical actions. The Financial Industry Regulatory Authority (FINRA) and the client’s state insurance and securities department will have records of disciplinary actions against the financial planner and other financial planners working with him/her. Based on the person’s interviews of possible financial planners and reviews of background information, the person is ready to choose the appropriate financial planner for his/her retirement.
The fourth step is actually working with the financial planner. A person can hire/use a financial planner to merely set a plan or also for ongoing advice and guidance. A YouTube video explaining financial planners is here: https://www.youtube.com/watch?v=GLSjIYWkFh8
For a mere plan, the financial planner can be paid an hourly fee or flat rate; for ongoing assistance, a financial planner can be retained to oversee the person’s financial plan. The financial planner can help review the person’s anticipated expenses/inflation figures, explore the best funding sources for those expenses, plan the best way to fund those sources while the person is still working, understand federal and state tax consequences and, very importantly, draw up a Withdrawal Policy Statement that helps the person stick with his/her plan while adjusting for changes along the way to retirement. The Withdrawal Policy Statement will govern when, how, and in what amounts withdrawals will be made from the person’s nest egg to fund his/her retirement expenses. The statement also accounts for emergencies, shifting markets and other “triggers” for changing the time, method and amounts to be withdrawn. It allows the person’s retirement income to stretch and cover all his/her expenses during his/her entire retirement.
The final step is to actually adhere to the retirement plan by saving, contributing and otherwise working toward a well-funded retirement. If special emergencies, such as major illness and/or job loss, for example, occur along the way, the person should contact his/her financial advisor and make further adjustments to his/her plan. Though the future guarantees only change, possibly in unanticipated ways, this 5-step approach should give a young adult the best chance of attaining a financially secure retirement.
DO’S AND DON’TS
DON’T blindly hope that all basic expenses will be covered by whatever income will be available.
DO calculate anticipated rudimentary retirement expenses, plus enjoyment expenses, adjusting them for inflation as accurately as possible.
DO use a sample expense sheet such as the one provided by Vanguard here: https://investor.vanguard.com/home/?WT.srch=1
DO adjust anticipated expenses for inflation by using an online calculator such as the one provided by InflationData here: http://www.inflationdata.com/
DO calculate possible Social Security benefits here: http://www.ssa.gov/retire/estimator.html
DO find a financial planner, through work or independently. See a YouTube video explaining financial planners is here: https://www.youtube.com/watch?v=GLSjIYWkFh8
DO work with the financial planner, either to set a plan or for ongoing advice and guidance.
DO actually adhere to the retirement plan by saving, contributing and otherwise working toward a well-funded retirement.
By Kathy Catanzarite
Note from HandelontheLaw.com: This article is to be used as an educational guide only and should not be interpreted as a legal consultation. Readers of this article are advised to seek an attorney if a legal consultation is needed. Laws may vary by state and are subject to change, thus the accuracy of this information can not be guaranteed. Readers act on this information solely at their own risk. Neither the author, handelonthelaw.com, or any of its affiliates shall have any liability stemming from this article.
GENERAL LAW DOS AND DON'TS