You need to begin planning your financial future now. The more time you have to do this, the easier it will be for you to reach your goals. And no one knows your goals better than you do.
After all, you should have the best understanding of where you are and what you would like your life to be in the future. However, having goals is one thing — developing a plan to achieve them is quite another.
We think you’ll find this 5 Step Plan for Retirement helpful. But it’s up to you to make it happen.
5 Step Plan for Retirement
Step 1: Determine Your Retirement Needs
You may think that your retirement benefit and Social Security benefits will be enough, but enough for what? It all depends on what you want to do. You need to determine how much income you will need in retirement. The first step is to draw up a list of all your expenses.
Step 2: Estimate Your Retirement Income1
For workers who have not yet filed an application for Social Security retirement benefits, please use the Social Security Administration’s Online Retirement Estimator (disponsible en español) or you can get your personal Social Security Statement online by using your my Social Security account. Your online Statement gives you secure and convenient access to your earnings records. It also shows estimates for retirement, disability and survivors benefits.
Step 3: Calculate Your Expenses
Determine if your retirement income will be enough to meet your expected expenses. Retirement can be very expensive. Experts say you will need about 80 percent of your pre-retirement income to maintain your standard of living when you stop working. The difference between retirement dreams and what retirement will really be like depends a great deal on how much money you will have when you retire.
For example, a Tier 4 member retiring at age 62 with 25 years of service will receive a maximum retirement benefit of 50 percent of final average salary and Social Security income of 20 percent of pre-retirement earnings. In our example, the combination of Social Security and retirement benefit totals only 70 percent of pre-retirement income. Will this be enough for you?
Before you answer, remember, you may be retired for 15 to 20 years or longer. That means that inflation will have 15 or 20 years to eat away at the value of each dollar of income you have.
If inflation averages five percent during your retirement, in just 15 years your income would have to more than double just to buy the same amount as when you retired. The fact is your pension and Social Security benefits alone may not provide the level of income you’ll need throughout your retirement to allow you the freedom to make the lifestyle choices you would like. Where will you get the extra money you may need? If you’re like most of us, you will have to provide the additional retirement income through a savings and/or investment plan.
Step 4: Develop a Savings Plan
Your Savings Plan
The single most important key to a successful savings plan is to start early. No matter what your age, it’s not too early to start financial planning. The sooner you start saving, the more time your money has to grow. (See our Weekly Investment Plan to see how large a retirement account a weekly investment can grow by age 65.)
For some, retirement is a long way off. But the same process that you need to follow to buy your first home or meet the educational costs of your children will build the foundation for your retirement planning. If you are older, or you don’t have other concerns, you can focus completely on reaching your retirement goals.
Step 5: Start Now
How to Begin
Establish a realistic minimum that you will save each pay day, then pay yourself first. The only way to get into the savings habit is to just do it. If you can’t do it yourself, get someone to do it for you. Devise a plan, stick to it and set goals.
- Try payroll deductions to a credit union, savings account or the New York State (NYS) College Savings Program;
- Take advantage of the NYS Deferred Compensation Plan;
- Or, ask your bank to automatically transfer money from your checking account to your savings account.
The important thing is: Start Now! And don’t dip into your retirement savings.
The Next Step
With a few dollars put aside, you’ve got to decide what to do with them. After all, you worked hard to earn your money, now you want it to work hard for you. Financial security doesn’t just happen. It takes planning, investing, and commitment. Many people would like to invest but fear the risks. When investing, it’s important to make a conscious decision about what portion of your money will be in relatively safe investments and what portion will be in riskier ventures with a possibly higher payoff.
One way to lessen your risk is to diversify your portfolio. If you own stock, for example, it’s better to own several (in various industries) rather than just one or two. If your nest egg is small, one way to diversify is to purchase shares of a mutual fund which holds many kinds of investments.
It’s also a good idea to keep some of your money in liquid assets, from which it can be easily withdrawn. With all investments, be sure to understand what return, if any, is guaranteed, and what is merely estimated. Find out about sales commissions and management fees before you put money into an investment and take these items into account when figuring your potential return.
A Few General Rules
Beware
Rule 1. If any savings or investment plan sounds too good to be true, it probably is.
There is no shortage of people willing to promise you anything to get their hands on your money. Use your good judgment in determining reasonable expectations.
Determine Risk
Rule 2. The greater the return or the higher the interest rate, the greater the risk that you may lose some or all of your money.
On the other hand, if you lower the risk, the return or interest rate is usually lower. There are other risks besides the possibility that an investment will go down in value. You must consider the impact of inflation. If you put $100 in an insured savings account that earns 3 percent interest, but inflation is running at 3 percent, your money would actually lose buying power faster than it grows with interest.
Diversify
Rule 3. Don't put all your eggs in one basket.
How you save may be as important as how much you save. Diversify — put your money into a variety of investments. This will generally reduce your overall risk. In this way, a loss in one type of investment may be offset by gains in another type.
Learn
Rule 4. Do your homework.
Never invest in anything you don’t completely understand. Read financial papers and magazines. Many are available at your public library, if you don’t want to subscribe to them yourself. Tune in to any of the many Wall Street investment-related programs on radio or TV. Do your research on the web.
Seek a Financial Expert
Rule 5. Don’t be afraid to get expert help.
Choosing a financial planner, investment broker and/or insurance agent is like choosing any other professional — you have to do your homework. Be sure you know exactly what you’re buying before you purchase anything.
Check their credentials:
- What is their educational background?
- Are they certified?
- What is their experience?
- Do they have your best interest in mind?
Ask for references — ask your friends:
- What is their reputation?
Ask for a meeting:
- Will they offer a free consultation?
Ask questions:
- Will you incur any fees and costs?
- How are they paid?
Remember, it’s your money, invest wisely.
(This 5 step plan is for information purposes only and is not intended to provide specific individual financial, legal, investment plan or tax advice.)
1 Updated 10/20