Cents and Sensibility
Cents and Sensibility
The answer for retirement
is to ask the right questionsIf you have many years left until retirement, you might not think much about it. And yet, by asking yourself some key questions about your retirement, you'll be far better prepared for the day when it arrives.
Here are a few to consider:
>> What's my "vision" for retirement? We all envision different retirement lifestyles. You may want to work until 65 and then open up a small business. Your neighbors may want to retire early and spend their time traveling the world. Because each of us has his or her own unique retirement vision, we'll also end up with different financial needs during retirement -- which means we need to create personalized savings and investment strategies.
>> Where will my financial resources come from? Most people get their money for retirement from three sources: Social Security; company-sponsored plans, such as 401(k)s; and personal savings and investments. Because everyone's situation is different, there's no one "formula" for determining the percentage of your retirement income that must come from each of these sources. However, it makes sense for you to do all you can to build your resources in all three areas.
>> How much can I withdraw each year of my retirement? Thanks to advances in medicine and a growing awareness of the importance of healthy lifestyles, you can probably expect to spend between two and three decades in retirement. That's a long time -- and you certainly don't want to outlive your resources. Consequently, you'll want to estimate how much you'll have to live on during retirement, and how much you can afford to withdraw each year.
>> Am I protected against inflation? If inflation heats up again, your purchasing power could be seriously diminished during your retirement years. That's why you need to build a retirement portfolio that contains a sizable amount of growth-oriented investments that also meet your needs for diversification and your personal tolerance for risk.
>> Will I face big tax bills? Many people assume that their tax obligations will automatically drop when they retire, but that doesn't always happen. Your income from investments could easily keep you in the same tax bracket, or even push you to a higher one. To prevent this from happening, you'll want to consistently keep taxes in mind when you invest. You may want to explore tax-free options, such as the Roth IRA. Tax-deferred vehicles, such as your 401(k) or traditional IRA, are also valuable but, sooner or later, taxes will be due. One key to preventing these taxes from overwhelming you is to plan your withdrawals carefully, so that you're not taking out more than you need.
>> Can I maintain my financial independence? If you were to ever need some type of long-term care, such as an extended stay in a nursing home, you could face catastrophic costs. In fact, the average cost of a year's stay in a nursing home is about $50,000 -- and these costs could rise tremendously by the time you're retired. To protect your financial independence, you may want to invest in a long-term care policy, which transfers the risk of paying for long-term care from you to an insurer.
By thinking of these and other retirement-related inquiries, you'll motivate yourself to take action that can help ensure the type of retirement you want. If you're diligent, asking the right questions can lead to finding the right answers.
Guy Steele is a financial planner and head
of the Pali Palms office of Edward Jones. Send
planning and investing questions to him at 970
N. Kalaheo Ave., Suite C-210, Kailua, HI, 96734,
or by email at: gsteele2@pixi.com