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Planning for your retirement


September 2015

Is your retirement plan on track? How do you know? According to a survey by Employee Benefit Research Institute, 60 percent of Americans arent sure theyre on track to retire successfully. Unfortunately, many of them may be right.

The easiest way to find out if your golden years will be golden is to compare the amount you currently have invested in 401ks and other retirement accounts to your annual salary. One rule to follow is to save enough during your working years to generate 85 percent of your income in retirement. To do so means that you should set aside one years salary by age 35, two times your annual salary by age 40, four times your annual salary by age 50, five times your annual salary by age 55, six times your annual salary by age 60 and eight times your annual salary by age 67. If youre falling short of those benchmarks, you should consider increasing your monthly saving, if possible.

A quick evaluation like this is a good place to start, but most financial advisers suggest a full-blown progress report at least every two years to forecast the probability youll be able to retire comfortably. Online retirement calculators give a fairly accurate assessment especially the ones that perform Monte Carlo simulations to calculate probabilities. Just plug in your age, salary, average annual savings, Social Security benefit, the year you plan to retire, plus your savings and investment information. The answer you get back wont be as detailed or well thought out as what you get from a good financial adviser, but it will give you a starting point for discussion.

According to James F. Marshall, president of Spectrum Investment Advisors Inc. of Mequon, one of the most common mistakes people make when it comes to retirement planning is not saving enough while they are young or investing in only three or four investment options when they should be diversifying over 10 to 12 investment styles. "The average investor has a tendency to chase returns versus staying the course and staying diversified," he says.

For Marshall, starting early is key. "The first thing a high school or college graduate should do is to ask their parents to buy them two books as a graduation present The Millionaire Next Door by Thomas Stanley and William Danko, and The Total Money Makeover by Dave Ramsey. Reading these two books will give a young person a game plan to begin saving as soon as possible, and at minimum, taking advantage of an employers matching 401(k) plan. After 25 years in the business, we find that participants wait too long, well into their 40s and 50s, before taking retirement seriously."

One thing Marshall has learned in his many years as a retirement adviser is that parents play an important role in instilling investment planning in their children. "Those that start teaching finance to their kids at a young age such as allowances, etc. give them an advantage versus parents who do not take the time to teach them. Parents can be good teachers and role models by having their children watch what they do versus what they say. When we sit down one-on-one with 401(k) participants, we can usually tell if there has been good mentoring going on," says Marshall.

Marshall says that at Spectrum they encourage their clients to buy their children books early in their life. "Teach children the power of reading, and once they have embraced reading, which means spending a little less time playing games on a computer, begin to buy them investment books in their teenage years," he says.

Retirement Stress Test

1. When do you want to retire?

a. What does retirement look like to you? We suggest reading "The New Retirementality" by Mitch Anthony.

b. Consider "practicing retirement" by living on what you believe will be your income in retirement to determine if you will have enough to meet your needs.

2. Cash flow analysis

a. Understand your annual after-tax income needs.

b. Will your income needs increase or decrease in retirement?

3. Understand the impact of taxes in retirement

a. What taxable income will you have from Social Security, pensions, annuities and investments?

b. What impact will taxes have on your tax-deferred retirement savings?

4. Health care

a. Are you prepared in the event of long-term illness?

b. If you retire before age 65, how will you bridge the gap between retirement and Medicare benefits?

5. Social Security

a. Determine when is the best time to take Social Security.

b. Determine if your Social Security benefit will be taxed, and at what level.

6. Inflation

a. Do you plan on traveling or maintaining your current lifestyle?

b. Understand how inflation will impact your purchasing power.

7. Where do you want to live in retirement?

a. Is having your home paid for the best use of your retirement funds? Remember, you cant eat your house!

b. If you want a second residency, what are your best options own or rent? What states are most tax favorable?

8. Home equity line of credit

a. Have a home equity line of credit (HELOC) in place prior to retirement.

b. HELOC can often provide valuable flexibility to offset tax impact in a given tax year.

9. Employee benefits

a. Evaluate portability of your current employer benefits.

b. Understand your rollover options, stock option and their tax implications.

10. Distribution planning

a. How much of your money is saved in taxable, tax-deferred and tax-free?

b. In order to control taxes, determine where you will tax distributions for your cash flow.

11. Investments

a. Is your current level of savings sufficient to meet your retirement goals?

b. Does your risk match your objectives?

12. Review your estate plan

a. Are your estate planning documents up to date and will your assets pass to your heirs the way you want?

b. Review your life insurance and evaluate the benefits of long-term care. M

This story ran in the September 2015 issue of: