5 Things to Do to Improve a Retirement Investor’s Goal-Oriented Target
First and foremost, don’t panic. Retirement investors have plenty of options before them. Most of these choices are OK, but all of them might require some discipline on the investor’s part. In all likelihood if you’re reading this article, you’re pretty astute and already have some idea of what can be done. Let’s review them based on what I’ve seen most people do first.
- Increase your annual contribution. Remember, most financial advisers suggested shooting for a goal of contributing between 15%-20% of your salary into your retirement plan. Play around with the Retirement Readiness Calculator on this. You’ll be amazed how much difference this can have, especially if you have several decades before you retire. Remember our hypothetical 28 year-old from “How Does Goal-Oriented Targeting Work?” (FiduciaryNews.com, July 15, 2014). He had a GOT of 6.17% without included Social Security and a GOT of 2.97% with Social Security. Let’s say he wanted to keep a GOT of 3% and still save enough to not depend on Social Security. He can accomplish this by increasing his annual contribution rate from 3% to 15%.
- Lower your projected retirement income. The 80% Rule is just a guess. You can actually determine your true retirement expense with greater accuracy as you get closer to retirement. Most people usually try to cut their retirement expenses to get a lower GOT. This isn’t recommended because it’s fraught with risky and often filled with overly optimistic assumptions. Nonetheless, this is number two on the most-likely-to-try list. If our 28 year-old wanted to retain the 3% GOT without relying on Social Security and without raising contributions, he would need to cut expenses from $50,000 a year to $19,000 a year. You see, that’s not a very realistic expectation. Don’t try to lower your GOT by reducing your projected retirement income.
- Work Longer (full-time at the same company). Some people simply resign themselves to never retiring and assume their current employer will have no problem with this. For a few people this assumption is reasonable, for many others it’s a pipedream. If our 28 year-old want to retain the 3% GOT without relying on Social Security, without increasing contribution and without reducing retirement expenses, he would have to work at his current employer another 27 years.
- Work Longer (part-time). This is a lot easier than it sounds. You can pick one of your hobbies that offers an opportunity to earn extra cash or you can work at retail outlets who are always seeking veteran (read “more reliable”) associates. Of course, for our 28 year-old looking to ditch Social Security and still retain that 3% GOT without doing anything, all he needs to do is to find a job that replaces the Social Security annual payment of $31,092. Hmm, maybe that not as easy as it sounds.
- Some Combination of All of the Above. Eventually, people surrender to the idea that there is no “sure-fire” easy way to reduce their GOT. So, they try some combination of all of them. A reasonable combination for our 28 year-old is: Increase savings to 10% and find a part-time post-retirement job that pays $13,000 a year. Do that, and earn 3% a year means this fellow won’t be relying on Social Security.
The most important thing to remember is time heals all wounds. The more time you have, the more options you have and the easier it is to lower your GOT. It’s also vital to take a balanced approach on this. If you’ve got 20 years until you retire and a GOT of 5%, don’t knock yourself out trying to lower it to 3% “just because.” It makes no sense to starve yourself today so you can live lavishly for a tomorrow that may never come. On the flip-side, we have the lesson from the same hedonistic “eat, drink and be merry for tomorrow we shall die” approach a lot of baby boomers took in the 1980s. Those that survived are regretting it.
We’ll end with this little ditty from Aristotle: “The virtue of justice consists in moderation, as regulated by wisdom.” Or, if you prefer the Latin to the Greek, there’s Cicero who said “Never go to excess, but let moderation be your guide.”
Whether Greek or Roman, the philosophy was as true then as it is now. The best practice is to balance the needs of today with the needs of tomorrow. Sometimes that means living in moderation.
Interested in learning more about issues facing today’s 401k investors and how professionals advise them? Check out Mr. Carosa’s upcoming book Hey! What’s My Number?, available later this summer.
Mr. Carosa is available for keynote speaking engagements, especially in venues located in the Northeast, MidAtantic and Midwestern regions of the United States and in the Toronto region of Canada.