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By Stan Hinden | March 2008
For as long as I can remember, my wife Sara, has built her life around the motto: "Preparedness is next to Godliness." As a wife, mother, homemaker and later corporate manager, she's had an uncanny knack for anticipating and preparing for future events.
At home, Sara demonstrated this ability in ways large and small. If, for instance, we were having guests for dinner, they'd arrive to find the meal ready and the kitchen spotless. At work, where she managed the GE Information Systems training center, her daily classes, seminars and luncheons ran like clockwork.
Over the years, Sara often reminded me — sometimes forcefully — about the importance of preparedness. Unfortunately, as a daily newspaper reporter totally focused on my next story, I was unable to get past my habit of saying, "I'm busy, I'll do it later."
As a result, I never took the time to develop a retirement plan that would turn our savings into a steady income stream and, in time, help us cope with the costly health bills that are part of aging.
I am sure that we would be better off today if I had practiced Sara's brand of preparedness.
But one of my problems, I now realize, was that I never really understood the level of commitment needed for careful retirement planning. And although my job was writing about investments, I did not understand the self-discipline you need to organize your own financial future.
So, with the wonderful benefit of hindsight, this is the advice I wish I had given myself years ago:
Wake Up!Get your head around the idea that when you retire, your paycheck will stop. You may think: "Well, I know that." But knowing it and coping with it are two very different things. Remember, if you've been working steadily for several decades, your paycheck has been a great security blanket. And, if you're not prepared to see it disappear, you could be in for a big shock.
Look Ahead!Focus on the question: "How am I going to replace the income I now get from my job?" If you expect to have a pension, Social Security and an income from savings, then you're fortunate. There is a steady decline in the numbers of people who will retire with traditional company pensions. If you don't have a pension, then your savings will have to provide you with income. But, be warned. If you don't have enough savings, you may not be able to retire when you hope.
Crunch the Numbers!Look at your monthly expenses, and figure out the cost of your current lifestyle. Then, ask yourself: Will I have enough income in retirement to pay for my present lifestyle? Do not assume that your expenses in retirement will be lower than when you were working. As retirees, Sara and I found that our expenses were often higher than before-sometimes because of medical bills, sometimes, frankly, because we wanted to travel and enjoy our leisure time.
Bite the Bullet!If it is clear that your retirement income will not support your current expenses, then look for ways to reduce your expenses. It's a tough job-I've tried it — but it's far better to start the process while you're still getting a paycheck and still have the time to get control of your finances. There are many cost-cutting options-all the way from giving up small luxuries to moving to a less expensive community. Look at them all.
Stay on Track!Once you have reduced your expenses to match your expected income, draw up a budget so you will be able to monitor your retirement spending. Don't make your budget too tight; expenses tend to rise over time. And build in a "rainy day" fund; you will find that the retirement years are full of unexpected expenditures.
Learn to Play the Game!You wouldn't try to play chess or golf without knowing the rules. So, don't try to play The Investment Game until you learn the rules. It is wise to start studying long before you retire. Your future will depend on it. Fortunately, the world is awash with investment information. Your goal should be to come up with an investment plan that gives you income, helps you stay ahead of inflation and allows your savings to last as long as you do. If you need help, seek advice from a financial planner or other investment professional.
Plan an Active Retirement!There's a good chance that you will live for 20 years or more after you retire. Those can be interesting and satisfying years, especially if you have an activity or hobby that you enjoy. Retirement opens many doors and I have known retirees who have done truly remarkable things after their careers were supposedly over. Remember that the true challenge of retirement is maintain your physical and mental health as long as possible. That takes work but it is surely worth it.
The urgent need to prepare financially for retirement is borne out by this startling statistic from the Center for Retirement Research at Boston College:
Sixty-one percent of American households will be "at risk" of being unable to maintain their standard of living in retirement-even if they work until age 65 and turn all of their financial assets into income, including money received from reverse mortgages on their homes. One key reason for this gloomy forecast is the rising cost of health care.
So, clearly, now is the time for future retirees to start thinking about the seven steps described above. Moreover, whether you are five, 10 or 20 years away from retirement, it's never too early to start saving — especially because of the tremendous financial gains that can be achieved by a person who begins to save early in life. Develop the savings habit when you are relatively young, and your future will be that much brighter.
Copyright 2008, Stan Hinden. All rights reserved. Reprint permission required.
The author was compensated for writing this article by AARP Financial.
