Whatever decade of life you’re in, retirement is heading your way. Are you ready to change your lifestyle? Do you have the assets you expected? Are your investments working for you?
So … you want to be a millionaire?
Like that old bit from comedian Steve Martin, if you want to be a millionaire, first, get a million dollars. But the real trick is keeping that million dollars you earned and making it work for you when you are no longer working.
Retirement is becoming an increasingly critical issue throughout the country as more baby boomers retire. Nearly 17 percent of all Virginians are of retirement age, according to the U. S. census, all needing a good, personal financial plan to survive and thrive as a newly job-free resident.
To be able to live the lifestyle you lived as a wage earner for the rest of your life, enlisting the help of a financial planner is sound advice. The problem is, not many people understand what that means—until it’s too late. They have managed their money correctly up until now. They feel like they don’t necessarily want to share their financial secrets.
“Financial planning is very relationship-oriented,” Kristan Anderson, director of retirement plan services and financial planning for West Financial Services, says. People are coming in with financial information, which is very personal, she says. “I think you want to have that relationship with the planner and get comfortable with that before turning over all of that information.”
Then there is the question of when you should retire. Jason Fichtner, senior lecturer and associate director of the Master of International Economics and Finance program at the Johns Hopkins School of Advanced International Studies, says that most people hear there is an early eligibility age of 62 for retirement and don’t want to wait until 67 or later.
“Sixty-two is the most popular age,” he says. “In fact, 34 percent of people do that. But most don’t realize that if they take retirement at 62, it represents a 27 percent reduction in their monthly benefit that they would be getting if they had waited to retire later.”
He says that he would ask those applying for social security benefits at 62, ‘How long do you think you are going to live?’ “They would say ‘Oh, somewhere in my mid-80s.’ And I would say ‘Oh, you have enough income now to live another 20-plus years into retirement? And they would say ‘no,’ then they would pause. For some reason, living to that age of 80 or 85 didn’t equate to 20 years retirement income to them.”
“In terms of how to save and when to start, in general we talk more about habits and investment temperament than about dollar figures,” Megan Brinsfield, director of financial planning at Motley Fool Wealth Management, says. “The math for retirement is pretty simple, but people’s behavior often gets in their own way. They have to build an awareness of their own situation and how much they are spending.”
After you retire, one or more of your key investments—or your whole portfolio if you didn’t diversify enough—could go south tomorrow. Your son or daughter, or their kids, could suddenly need a small loan, or even serious funding assistance, today, instantly, now.
Luckily, retirement in Northern Virginia is generally a smooth segue from a life of relatively high earnings. According to the U.S. Census Bureau, in 2016, median household income for Northern Virginians averaged $101,658, nearly $40,000 more per year than the average for the whole state even when figuring in that regional average.
Virginians overall average retirement savings is nearly half a million, $432,229, according to Personal Capital Advisors Corporation, an investment advisor.
But no matter what you earned while you were employed, the whole process can be a bit of a sticky wicket when you are trying to cover every contingency, making sure that you and your loved ones are safe and secure, and that the legacy you hope to leave is one of a financially-independent, frugal-and-prudent money manager who not only lived comfortably because of careful financial planning but was able to have enough to help out when and where needed to those that matter most to you.
How much do I really need to save for retirement?
According to a new study from Bankrate, a leading financial information source, 28 percent of employed Americans say they are saving more for retirement this year compared to last year, which is the highest rate of increased retirement savings and nearly double the number of increased savers since the survey debuted in 2011.
Only 13 percent of working Americans are saving less than last year—the lowest on record and less than half of the 29 percent found seven years ago. “You need to save enough for retirement to provide you 80 to 90 percent of what you are living on now,” says Brenda Blisk, founder, CEO and wealth manager of Blisk Financial Group. “It’s been our experience that people don’t reduce their lifestyle when they retire. They have gotten used to let’s say living on $6,000 a month. It is a big shock to try to live on $3,000 a month,” she says. “And most cannot make that leap.”
More than six in 10 Americans (61 percent) don’t know how much money they’ll need to save for retirement, according to the Bankrate study. Nineteen million Americans say they never plan to retire, including 9 percent of both millennials (18-37 year olds) and baby boomers (54-72 year olds).
Millennials are most likely to be unsure of how much money they’ll need in retirement (69 percent). However, older Americans aren’t much closer to having their retirement budgets calculated. This includes 56 percent of GenXers (ages 38-53), 58 percent of baby boomers and 59 percent of those ages 73-plus.
Bankrate survey respondents who have put some thought into the amount they need to save are mixed. Seven percent say $250,000-$500,000; 8 percent say either $250,000 or less.
Gen Xers are twice as likely as any other age group to say they need over $1 million to retire.
“We’re facing the first generations of American workers approaching retirement with no clear idea of how much money they can count on receiving or what they can safely spend from their savings, such as IRAs and 401(k) accounts, without running out of money,” Dr. Michael Finke, Alliance for Lifetime Income Research Fellow and dean and chief academic officer of The American College of Financial Services, said in a recent press release from Alliance.
How much debt is too much?
Virginians’ average credit score is 680, above the U.S. average of 675. They own an average of three credit cards and carry a credit card debt of $7,161, according to a study, “State of Credit 2017” by Experian.
Credit card debt is creeping up again and so are delinquencies. For those who are buying homes, mortgage debt is up sharply, a reflection of fast-rising housing prices. The study reports that years of aggressive auto lending, particularly targeting subprime buyers, have led to a dramatic increase in delinquencies and repossessions. Still, there’s a dramatic difference between the youngest, Generation Z (born after 1996), and the oldest, the so-called silent generation (born before 1946).
Gen Z’s average score is 634, while “silents” are almost 100 points higher, at 729. Millennials (born 1982-1995) don’t fare much better at 638, and Generation X (1967-1981) is 658. Only when the age scale reaches boomers (1947-1966) does the average surpass 700 (703).
A Pew study found that just 46 percent of Americans earn more than they spend every month, suggesting that’s true for a majority of Americans. That means increased likelihood that bills won’t be paid.
About one-third of America’s 44 million student loan debtors say they were late paying that bill at least once last year. “We analyze college debt,” Blisk says. “All college debt is not equal. Some of those loans need to be paid off first, some later and sometimes you should consolidate that debt.”
Brinsfield says that good debt is manageable debt. “As long as you can manage your debt and incorporate savings goals alongside debt reduction, I think that debt is not an inherently bad thing,” she says. “Where debt becomes a bad thing is when you are a slave to it. You can’t afford to make a career change or live in a better location.”
Should I invest?
Between IRAs, working through complicated tax cuts or playing the stock market, most financial planners say that the best way to invest is with your 401(k).
“Any time that you can put money away prior to being taxed, you should max it out,” Blisk says. “I like to tell clients you want to try to put away 20 percent of what you earn and build your lifestyle after that. You got 20 percent and you worked hard for that. The 80 percent left out would go to mortgage and rent. What you need [to] live on, you take it out of that.”
She says that it’s a take-it-off-the-top strategy, which is a much better strategy than any “Oh, what do I have left over” strategy.
Investing in the stock market has a lot of trapdoors. “The smart thing to do is to take 20 percent off the table if your stock increases and diversify it into some other type of industry if you wanted to keep that money growing,” Blisk says. “You should always do that in your one stock strategy, where you take a certain amount off of the table, and then you stick to your plan.”
She says that in Northern Virginia, executives at large companies like Lockheed Martin get a lot of shares as part of their executive compensation. But that should not be their only stock investment. “If you do that, you are actually taking on two risks,” Blisk says. “What if the company doesn’t do so well? Your salary goes down, the company stock and retirement plan goes down. So you really need to diversify.”
Brinsfield says that Motley Fool recommends buying stock in a broad and diversified way. “Whether that means buying 30 or more stocks, or investing in low cost index funds to get exposure to the broad marketplace—those are great choices,” she says. “Investing in single stock is not a reliable way to reach retirement goals, and we don’t believe that there is any magic bullet out there to achieve grandiose returns like a million dollars in a brief amount of time.”
Brinsfield also says that your primary residence should be viewed as necessary and not an investment. “You need a place to live and you should not use your home as an investment resource,” she says. “Even if you can find a higher value later for your home, you still have to find a place to live. Having real estate as part of your investment portfolio in rentals would be appropriate in a measured way. But relying on a single source of investment to provide all of your returns for retirement is not prudent.”