Millions and millions of Americans are moving closer to retirement each year, awaiting that joyous day when they can leave work behind and enjoy the carefree life. No time clock, no bosses and certainly a lot less stress.
At the same time, many on the cusp of retirement have no clear idea of where they stand financially or have done little to prepare for the next stage of their life.
Too many people turn age 62 or 65 and immediately retire without having any financial plan in place, says Sacramento certified financial planner Elfrena Foord. They just dont connect the dots and end up with money problems just a few short years into retirement.
She says that while retirement runs smoothly if you develop a long-term financial plan early in life, its never too late to get started. Weve had clients come in our office at age 60 without any plan at all and if they have to work until theyre 70, they do have 10 years to build their investment portfolio, she adds.
Rancho Cordova resident David A. Ivazian says the key for his family was to plan for retirement from the get-go. The former Air Force captain and ex-Aerojet employee had a simple plan to fund his retirement:
• Never spend more than you make.
• Save as much as you can, but if you get some extra money, its OK to blow half as long as you save the other half.
• When working, invest to the maximum allowed in your 401(k) and/or IRA.
• Pay as little taxes as possible.
While some complain that you should be careful getting company stock, take advantage of such programs, he advises. Once you turn 55 you can take disbursements from IRAs without a penalty; however, you might have to pay a tax. That is why I use Turbo Tax the last week of December to know my exact tax status and how much I can withdraw from my IRA and still pay no taxes.
Ivazians first rule of investing is to buy a home, but says not to think of it as an investment and never borrow against the equity you have in it. Pay (off) the mortgage as soon as possible, he advises.
Another key investment is education, he says, as in learning about stocks and bonds, which pays off over the years. Ivazian has learned to invest in high-grade stocks such as Disney, IBM and Boeing that provide more dividend income than savings accounts yield.
For Placerville resident Jon Bromenschenkel, planning was the key to his easing into retirement.
The former engineer says he learned early in life that the dream job could become a nightmare with the change of only one key manager, and I knew that there would be no pension for me so I had to create my own in order to not try and live on Social Security alone.
Fortunately, Bromenschenkel, now 70, says he had been investing since his 20s so when things turned from bad to worse, he left the workplace at age 61. And hes never looked back.
The best investments I made were the houses I bought to live in and the mutual funds I chose to own. The worst were the investments that so-called advisers got me into. Fortunately, I did not let any of them have all my eggs, he says. Now he acknowledges that hes found a couple of investment groups working for us that are actually fiscally responsible, but it took a lot of time for me to educate myself and I did have that luxury of time while working.
He also notes that advice from friends and relatives can be terrible because they havent done due diligence. Hot stock tips from friends and neighbors rarely pay off, financial experts say.
But as Sacramento financial adviser Bob Dreizler notes, Bromenschenkels success story isnt common enough.
When Dreizler meets with a new client, the first question is when can they retire.
I think the word comfortably is implied in this question and for some people, I tell them that they will need to keep working as long as they humanly can.
For others who have a big public pension or two coming in, plus Social Security and money in retirement account, I tell them not to get frivolous and not to worry too much, Dreizler says.
But most people fall somewhere in between, and their best strategy is to spend and invest intelligently, he adds.
There are so many factors that impact how long your money lasts during your retirement years: longevity, large medical or long-term care expenses, investment performance and inflation, he says.
In our perpetual microscopic interest-rate environment, its hard to find safe investments that keep up with inflation. I think that you have to have a higher portion of your investments in stocks and diversified income-producing mutual funds than in bonds and CDs, but this scares most people.
Dreizler notes that those working longer have the opportunity to build up their retirement savings and can delay taking Social Security, thereby giving them a larger payout down the road.
I think the general rule is that you should wait as long as possible to start taking Social Security, particularly if you are in good health and dont really need the extra money yet. If you have serious health problems or are a whiz at managing money, you might want to start earlier.
Money manager Dan Seidman, who has offices in Sacramento and the greater Boston area, says that those building up their assets for retirement need to look at their complete financial picture.
He says the first step toward a safe financial retirement is to pay down your debts. You certainly dont want to have any credit card debt on the books and your car should be free and clear as well, Seidman says. In addition, in a perfect world, youd own your home outright or only have a few years left paying off the mortgage.
Financial planner Foord agrees and points out that while you may meet the goal of paying off your house, youll need to have money set aside for repairs and updates. If youve lived in that same house for 10 to 20 years, chances are youll want to update the kitchen or put on a new roof and that can be costly so youll need to have a cash account set up to handle such major expenses in retirement, she says.
Seidman says that in retirement, you are going to need personal savings, pension and Social Security. Some people wont get a pension so theyll either have to work longer, giving them more Social Security income, or invest better to achieve higher returns.
Or, he notes, they might have to use their home as part of their financial picture. By this I mean that they can downsize their home after the kids leave and/or move to a lower-cost area. If they do so, theyll likely have extra cash that they can either invest or use to pay their bills going forward.
An investor doesnt have to be aggressive if they have a long-term horizon. If you get a reasonable return, 6 percent to 8 percent over 30 years, and save regularly via a 401(k), IRA or ROTH IRA, a person should be in reasonable financial condition to retire.
On the flip side, he says you really cannot bulk up in five years if you have neglected the prior 20 to 25.
His advice for those five years from retirement?
Step one would be to focus on eliminating debt. Then you should maximize all retirement payments into your 401(k). Once thats done, start an IRA or Roth IRA. You are allowed to make extra payments after age 50 you can contribute $6,500 per year (to an IRA or Roth IRA) as opposed to $5,500 for those not yet 50.
Contrary to what many might think, your house would be the most likely place to look for extra cash in those last years, Seidman says. Can you go to a smaller place? Pay cash for that place, and then use the residual as personal savings. You get $250,000 as an individual or $500,000 as a couple in free appreciation before capital gains taxes are due, Seidman explains.
The new retirement for many likely involves part-time work and not a life of playing golf day after day. Or it also might mean serving on boards or volunteering, he adds.