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Empty Nest? Time to Focus on the Nest Egg

“Each child reduces the household wealth of Americans between the ages of 30 and 59 by about 3% or 4%, according to data from the Center for Retirement Research at Boston College.”

After decades devoted to rearing children, it happens: parents realize that they’ve neglected their own retirement savings. Once the nest empties out, says USA Today, it’s time to refocus on building up savings accounts. How do you do it? The answers are in the article “5 ways empty nesters can boost their savings and turbocharge their 401(k)s.”

Here’s a five-step plan for making this happen.

Up the savings side. Once you’re not spending cash on your kids for clothes, college funds, cars and car insurance, that cash can move into retirement savings. The maximum for a 401(k) in 2019 is $19,000, and if you are over age 50, you can add $6,000 as a “catch-up” contribution. For annual IRA contributions, the limit is $5,000 with a catch-up of $1,000. Increase your paycheck deductions to the percentage, that will get you to the IRS limits. Put savings first.

If there’s a match, don’t miss it. Lucky enough to work for a company that matches all or part of your retirement savings? Do whatever you can to take full advantage of that free money. The most common company match is 50 cents per dollar on 6% of pay, according to Vanguard Group, which says that 70% of 401(k) plans had this match in place in 2017. Let’s say you earn $75,000 and save 6% of your pay. The company would give you $2,250, which means you’d be boosting your savings to $6,750.

Max out savings. The more money that is saved, the faster the nest egg grows. A married couple that socks away a combined $50,000 in pretax dollars every year in their 401(k)s, can find themselves with an additional $250,000 in five years. That’s not counting company matches or any investment growth.

Catch-up as fast as you can. Over 50? The IRS promotes savings by allowing catch-up contributions. An additional $6,000 is allowed in a 401(k). Parents who were paying for summer sleep away camp or riding lessons, can move those dollars into their own retirement accounts.

Control spending. The natural inclination when cash flow loosens up, is to spend more. Many people decide to live it up during these years, feeling like they deserve to enjoy themselves after dedicating so many years to their children. There’s a balance that needs to be found between enjoying and over-spending. Most families increase their retirement savings when the children are gone, but not by enough. Ramping up spending, instead of saving, means years of missed opportunities to build your retirement accounts.

The best advice is to take the long view. Savings instead of putting a convertible in the garage or taking lavish vacations, when a more modest approach is equally enjoyable, could change the nature of your retirement.

Reference: USA Today (Jan. 14, 2019) “5 ways empty nesters can boost their savings and turbocharge their 401(k)s”

Retirement Planning Tips For the Coming Year

“Are you ready for retirement? There are steps you should take to ensure you’re able to live the life you desire, once it’s time to pass the management reins to the next generation.”

On average, American men today will live to 84.3 years, says the U.S. Department of Social Security. That means you can expect to enjoy at least 20 years of retirement or muddle through two decades of financial worry, depending on your level of preparation.

Consider that the average monthly income for a couple receiving Social Security benefits is $2,176. That’s about $26,000 a year, says Farm Journal’s Ag Pro in the article “5 Retirement Investment Tips.” If that’s an average benefit, then farm couples should expect to receive less than that. Why? Because farmers are very good at avoiding taxes, said David Marrison, Ohio State University Extension specialist. Even if they receive the average amount, he asks, where’s the rest of the household income?

When it comes to retirement income, about $26,000 is just not enough. To allow for a comfortable retirement and limit negative impact on the family farm, or any family business for that matter, planning must be done in advance. Here are a few tips that are simple, direct and can make a difference for your retirement.

When are you going to retire? Many people retire at 65.  However, the decision often needs to be made from a financial perspective and not based on age. If you can work a little longer, that may give you a better chance of building up enough finances to retire comfortably.

What’s your budget? This is where so many people fail. How much money are you going to need when you retire, starts with knowing how much money you are spending now. For farm and business owning families, some expenses can get co-mingled, such as fuel or utilities. Get into the details and make sure you are not missing any expenses.

Inflation. Recent years have seen a very low impact of inflation but that may be changing. Once you’ve identified your target savings goal, build in inflation. Here’s one way to do it: take the number 72 and divide it by an interest-rate factor. Many experts use 4%, which is the average inflation rate for the last five decades. Using this rule, you can expect your living expenses to double what they are today because of inflation. Sounds scary? That’s why planning is so important.

Make a plan for savings. View retirement as both a means to an end and a way to reduce tax liability. For farmers, good times used to translate into mitigating taxes, by purchasing equipment. However, it’s likely that putting away money in a 401(k) may have been a better idea.

Start saving today. Even if all you are doing is setting aside 10% for the future, if you are young enough that can be a good start.

Add to these tips getting your estate plan done or updating your estate plan. Your estate plan is a critical piece for farm families, who want to pass the farm down to the next generation. In addition to a will, you also need Power of Attorney for your finances and documents for health care. Make an appointment with a local estate planning attorney to get this done.

Reference: Farm Journal’s Ag Pro (Dec. 24, 2018) “5 Retirement Investment Tips”

Make Your Retirement Dreams Come True

“While a retirement wish list might include roaming the world or pursuing a luxurious hobby, the daily realities of paying off a mortgage or funding a child’s education can make it tough to save.”

Moving from general concepts to specific retirement activities you think you’ll want to do during retirement, can help you do a better job of saving and planning, advises U.S. News & World Report in the article “Will You be Able to Afford the Lifestyle of Your Dreams in Retirement?” Increased longevity has made retirement a time to begin anew. This requires a different mindset. Regardless of your retirement dreams, you’ll need more funding for a longer retirement.

Here are some pointers to help get retirement savings on track:

What do you want to do? Vague goals like travel may not motivate your savings. However, if you’ve identified the cost of living in Paris for six months, you’ve got a real concrete goal to work toward. That provides more motivation and helps avoid impulse spending. Get specific: write down what you want to do and start researching what it will cost.

Do a test drive first. If your spouse wants to live in an RV full time, that’s great as long as you do. However, don’t sell the house before testing it out. Try renting an RV and living in it for at least a month. The same is true for living in a house in the woods. Sounds great—but if you’re a city dweller, how will you feel after a few months of living in an isolated spot?

Think about how long you want to work. Many people today work into their late 60s and early 70s. If they have a desk job, and they have reached a certain level of success, there may not need to be a cut-off date for retirement. What about taking more time off for vacations or working part time? Recent studies have shown that working even a few more years, can have a major impact on the quality of your full retirement.

Do the math. Once you have some concrete plans in place, run the numbers. Consider how you might make the money you have last longer. Look at housing prices, if downsizing to a less expensive area is on your list. If you plan on travelling, do you have to stay in five-star hotels, or could you be content with Road Scholar, formerly known as Elderhostels?

Remember to include health care costs. You’ll need to include the cost of medical expenses, including Medicare premiums, deductibles, copays and coinsurance, among other costs. This is especially true, if one or both spouses have any chronic conditions.

Now, what’s your savings plan? Once you have all this information, you’ll be able to determine how much you need to save, each year and each month. When you combine all your retirement income sources, do you have enough to sustain your retirement dreams? Or do you need to adjust your savings?

Reference: U.S. News & World Report (Dec. 19, 2018) “Will You be Able to Afford the Lifestyle of Your Dreams in Retirement?”

A Note to Younger People: Heed the Voice of Experience

“If you could, what financial advice would you give your younger self?”

We like to think that we live without regrets, but it’s not always easy to do, especially when it comes to planning for retirement, says The Washington Post in “The top regrets of retirees.” A study looking at retirees found that many, and especially women, admitted that they had made mistakes in their retirement planning. The report from Global Atlantic was based on data from more than 4,200 retirees and pre-retirees in America. The company wanted to learn how expectations for retirement costs lined up with reality.

The expectations often did not.

The risk of running out of money is real, said the report, noting that 39% of retirees said they had planning regrets. Here are the top reasons for regret:

They found themselves relying too much on Social Security for income.

They did not pay down debt before retiring. Many people today are retiring with a mortgage. People used to pay off their mortgage before retiring, but it’s less and less common now.

They didn’t save enough. Most people didn’t start saving for retirement, until they turned 31. Missing almost a decade in saving can make a huge difference over time. Let’s say an employee puts away $50 every time she gets a paycheck—twice a month—and puts the money into an account with a 6% annualized return. If she started saving at age 23, by retirement age she’d have $227,150 in that account. If she waited to start saving until age 31, the account would be worth $128,578—$88,572 less. If she was able to save $100 per paycheck, by retirement, she’d have $434,299 versus $257,156.

The power of time and compounding makes a huge difference. Compounding is the process through which an asset’s earnings are reinvested to earn additional earnings over time. The more time your assets have to grow, the most compounded growth can occur.

Age 31 seems relatively young to start thinking about retirement, but by waiting that long, workers are missing out on almost a decade of savings, asset accumulation and the associated potential of compound returns.

The survey also revealed that women are more likely than men to have retirement planning regrets. How’s this for a difference: 62% of women had retirement regrets, versus 47% of men. The women also noted that once they realized their mistakes, more women than men adjusted their lifestyles to increase savings, by cutting expenses, like traveling or eating out.

If you have retirement regrets, your best course of action is to do the best you can now, without worrying about what you didn’t know in the past.

Reference: The Washington Post (Dec. 10, 2018) “The top regrets of retirees.”

The Retirement Money Question: How Much?

“Most of us vastly underestimate the percentage of income we’ll need. Here’s how to make sure you get that number right.”

This is the question everyone wants to have answered as they save, work and plan for their retirement: How much money will I need, when I finally stop working and retire? The typical approach of asking what percentage of your final salary you’ll need is not quite right, says The Wall Street Journal in the article “How Much Money Will You Really Spend in Retirement? Probably a Lot More Than You Think.”

This is a complex question and one that requires more knowledge than most people have, even professionals. Just imagine the data you need:

• The cost of health care
• How much health care you’ll need
• The health of Social Security
• The rate of inflation
• Your risk tolerance level
• How you want to spend your time during retirement

Try figuring this out on your own. How can you know all or any of these items?

To better understand how people approach this question, hundreds of people were invited to a research lab and asked how much of their salary they thought they would need in retirement. The answer most people gave was about 70%. The people were then asked how they got to that number. The answer, not surprisingly, was they had heard it somewhere.

To dig in deeper, another group of participants was asked specific questions about how they wanted to enjoy their time during retirement. Based on this information, the cost of these activities was calculated and then a calculation was done to find out what percentage of their salary they would need to support the type of life they imagined they would have in retirement.

The answer was 130%. That meant their savings rates would have to double for a successful retirement.

How is this possible? Working is cheap. You’re not spending a lot because you’re busy working. The company pays for your health insurance, life insurance and there’s even a breakroom stocked with great coffee and snacks.

When you retire, you’re spending money you would not be spending while you are working. Two big vacations a year, recreational activities and dining out more all add up quickly. So how can you plan successfully for the retirement lifestyle you want?

Think (realistically) about the costs of the activities you have in mind and get as detailed as you can. Once you know how much you want to spend, add them up. Use a spreadsheet or a notepad, but this exercise will give you more information than the simple conventional wisdom of 70%.

Now that you know how much money your dream retirement will require, start to plan what you need to do to get there or adjust your dream retirement. Work backwards to figure out how much risk you are comfortable with your investment portfolios and how much cutting back you’re willing to do in your pre-retirement life for your dream retirement. It’s better to know, years in advance, than to be brought up short and have your retirement dreams come crashing down.

Reference: The Wall Street Journal (Sep. 3, 2018) “How Much Money Will You Really Spend in Retirement? Probably a Lot More Than You Think”

Fiscal Words of Wisdom from One Who’s Been There, Done That

“There is no doubt that, for the most part, parents are much more involved with their children and their children’s more numerous activities, than parents were when I was growing up.”

If this describes you and your kids, then you need to prepare yourself for the adjustments that happen when the last child leaves the house. It can be emotionally and financially challenging, according to the Daily Messenger in the article “John Ninfo: Some advice for empty nesters”

With one less person in the household, it’s time to re-adjust your budget. Many of your everyday expenses, such as electricity, food and gas, will likely be lower. However, you may have new expenses related to your new life. You may spend more on activities that were put off until the kids grew up or find yourself dining out more often. Go slow when it comes to spending money on pricey vacations or fancy dinners. You want to strike a balance between enjoying your new-found freedom and cash flow, as well as keeping retirement savings in mind.

Assuming your cash flow is easier now, it’s time to commit to paying down outstanding debts, especially credit card debt. Reduce any interest or finance charges that you can. You might even think about paying down your mortgage or paying off a high-interest car loan. If you’ve taken on student loans or a home equity loan, now is the time to try to knock those down. At the same time, try to minimize any new spending or borrowing.

Take another look at how your retirement saving is progressing. Will you have enough at your current rate of spending, or should you ramp up your efforts, if you have room in your budget?

Have you thought about downsizing, or decluttering? Even if you are not planning on moving, your home may be filled with things you don’t need or want anymore. Set some time aside to clear out what you don’t need, donate what you can to a local charity or start planning yard sales. You don’t have to tackle this project all at once.  It is possible to donate a few hours each weekend to the task.

When was the last time you updated your will and other estate planning documents? Now is the time to revisit these matters, as well as looking at any long-term care insurance. If you don’t have a long-term policy in place, this is the time to buy it—if you can.

Are you finding yourself with a lot of free time? We don’t often ask ourselves the important questions, like “What matters to me?” and “How do I want to be remembered?” Many people find the answers to those questions in service to others. If you’re not already volunteering with an organization, find the ones that resonate with your values and get involved.

Don’t immediately start on expensive home renovations or decorations. Give yourself time to adjust to a quieter house and think about where you want to invest those resources before spending. A redecorating project is fun but may be making yourself busy and filling time. The project may not actually be affordable.

The empty nest presents many new opportunities for a fresh start. Use them wisely.

Reference: Daily Messenger (August 26, 2018) “John Ninfo: Some advice for empty nesters”