Financial Planning, Retirement Issues


Why is Compounding Important to Retirement

August 21st, 2016 ernie Posted in Retirement Income No Comments »

why is compounding important to retirementThe question, why is compounding important to retirement is one that everyone should understand the answer to. If you can take advantage of compound interest, compound dividends and income, your retirement savings are going to be significantly higher and your quality of life is going to be much better in retirement. This is where you let your savings work for you and help you. Many people would say that interest rates are so low right now that it does not really matter. You are not going to earn much anyway. Yes interest rates are low, but even 3% income is better than no income and over 30 years it can still add up to a significant amount. A few examples will help to illustrate.

Why is Compounding Important to Retirement

If you start saving $100 per month at age 25 for retirement and continue until you are 55 assuming that you do not generate any kind of interest or dividend income, your savings will be 30 years times 12 months times $100 = $36,000. Not very much and not enough to live on in retirement.

If you averaged 3% over those same 30 years,  your savings would jump to over $58,000. In fact your compound income is almost equal to what you contributed. Interest rates and dividend rates are low at this time, however over 30 years they probably will average close to 6% making your $100 investment over 30 years grow to over $100,000!

Consumers who can save more for retirement or who work longer will find that their money grows even further. Many people will work until they are 65 or 40 years in our example. Their money would grow to almost $200,000 at 6% or almost doubling over that extra 10 years.

If you can save more early on, your compound interest income is going to grow even faster. Focus on high quality dividend paying stocks that have a history of increasing dividend every year and you will do very well in deed over your working career.

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Will You Work While Retired

December 21st, 2015 ernie Posted in Retirement Income No Comments »

Will You Work While RetiredWill you work while retired? That is the question many retirees ask themselves particularly if they are short of cash for some of the things they would like to do in retirement. A study published last month by Bankers Life Center for a Secure Retirement – “New Expectations, New Rewards: Work in Retirement for Middle-Income Boomers” — found that 72% of retired baby boomers currently aren’t working for pay in retirement. However, almost half of those retirees (48%) said they would like to work — but can’t. Of those, 35% said their health won’t allow them to work, 8% said they were unable to find a job, and 5% said they have to care for a loved one. This is the reality for many baby boomers and retirees.

Will You Work While Retired – What is Your Plan

This article is really aimed at the folks who are about to retire. Whether it is a plan retirement date or you are being forced to retire or you need to retire due to health reasons, now is the time to give some thought about what you will do once retired.

Some people will be able to walk into another job pretty quick, while many will struggle for a variety of reasons as mentioned in the survey results. If you do not have a plan before you retire, there is a high probability you will not be working in retirement.

Develop a plan now. Will you volunteer which leads to networking opportunities and potential employment? Will you start your own business? Do you have a business plan? Can you prepare for your business now? If you have sufficient income, there may not be as much pressure to work. Boredom will motivate you into looking for work.

If income is an issue once you enter retirement, then a plan is definitely needed. The plan needs to take into account how much money you need per year, what kind of job you can find and how many hours a week you need to work at the appropriate income level. Lower incomes means you work longer etc.

Part time work is also good for many people. You may have the best of both worlds. You still have time to enjoy the family and hobbies. You also have the extra income you need from part time work. And you also have the social side of work which is a big plus for many people once they leave the work force.

Make that plan now!

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Retirement Withdrawal Strategies

August 7th, 2015 ernie Posted in Retirement Income No Comments »

Retirement Withdrawal StrategiesRetirement withdrawal strategies are all over the map and it really depends on who you talk to or what you read. As someone who is thinking about retirement and wondering how much money I will have to spend every year, I have been following the retirement withdrawal strategies put forth by many financial planners. Bottom line with all of these guys is that they are trying to sell me something so I need to figure out for myself what the best approach is for my personal situation. There are three main strategies with many combinations of them all, so I thought it would be a good idea to review these for readers. You will have to figure out for yourself based on your personal situation which one or what combination is best for you.

Retirement Withdrawal Strategies

Follow the 4% rule – the simplest one is to take 4% of your balance of savings  calculated at the end of the previous year. Since your portfolio will vary every year, your income will vary every year as well. If your portfolio is generating less than 4% in terms of dividends and interest, then your portfolio is going to decline each year and so is your income. Something to think about!

Income only rule – is a good one in that you never touch your principle, but your income will also vary with this approach as well since dividends change, interest rates change and distributions from mutual funds change every year. If you can live on the income only, you will have a better chance of your savings lasting well into your retirement with some left over for the kids.

Variable Amount rule – this approach is based on taking out a fixed amount each year based on how well your portfolio is doing. In good years, you get to take more out, while in bad years when the market is down, your income will be down as well.

Can you live with these variables or are you the type that needs to have a fixed amount coming in each month year over year? The answer to this question will help determine which approach or combination of approaches you decide on!

Retirement Withdrawal Strategies – How long will you live?

The other big unknown is how long will you live? This will determine just how long your money will last and how much you will be able to spend each year. Be realistic,  take your health into account and your genes when making this assumption. Good luck with your retirement plan!

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Avoid Penny Pinching in Retirement

May 7th, 2015 ernie Posted in Retirement Income No Comments »

Avoid Penny Pinching in RetirementThis is not rocket science although some financial advisers will try to make you think that it is. If you want to avoid penny pinching in retirement, there are some basic rules that need to be followed throughout life and they are pretty simple. Keep working, save for retirement and save for emergencies. Finally don’t touch either of these savings areas until you actually retire or have a real emergency. Sure there are some calculations that need to be done to avoid drawing too much money out too quickly, but for the most part you need to set sufficient money aside for retirement.

Steps to Take to Avoid Penny Pinching in Retirement

  • Work longer
  • Reverse mortgage
  • Reduce spending
  • Save more
  • Start saving early

Work longer – while you may have wanted to retire early, if you do not have the money to do some of the things you want to in retirement, you may have to work a little longer than you planned. Every extra year you work adds to your savings and provides income to live on.

Reverse mortgage – we are not fans of a reverse mortgage, however if you have equity in your home and do not want to move, then a reverse mortgage is one way to get at some of the money locked up in your home. Of course at some point you will need to sell your home to pay off the mortgage that has accumulated through a reverse mortgage.

Reduce spending – examine all of your expenses and decide which ones are must haves and those that are nice to have. Reduce your spending wherever you can without entering the penny pinching mode.

Save more – more cash towards your retirement. Set aside at least 10% of your gross income every week or every pay check. Start early when you begin working and do not touch it until it is time to retire!

Start saving early – start on your first job and invest 10% of your income. Once you get use to doing this and living on 90%, you will not miss it and your retirement will be secure providing that you work a normal life and do not touch your savings until you actually retire.

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Retirement Income Strategies

June 7th, 2014 ernie Posted in Retirement Income No Comments »

Retirement Income StrategiesDeveloping your own personal retirement income strategies can be a little daunting for many people. This can be a large complex problem if it is not broken down into individual small steps. But if you can break it down and use the assistance of a financial planner to help with some of the steps, consumers can end up with a well thought out plan that will help them meet realistic goals and objectives for their retirement. The wheel in the picture demonstrates how to get started. Not that this is a circular wheel with no end point. That is because after you have developed your first view or your retirement income strategies, each consumer will  at regular intervals update the plan following the same systematic approach. We will discuss each of these steps in a little more detail.

Retirement Income Strategies – Self Assessment

The first step is to gather all of your financial data that you have currently. This includes your current savings as well as your current debt. It also includes loans, mortgages and retirement plans that you may be eligible for when you retire from your company or personal plans. This is a snap shot of your financial situation at the present time.

Goal Setting

The next step is to set some realistic goals. These include when you anticipate retiring, when you will have your home paid off and how much debt you may carry into retirement. What are your plans for retirement? Will you travel a great deal or do you plan to continue working. What large expenses will you have in retirement. How do you see your life in financial terms when you retire. This leads to understanding the level of income you will need to generate to maintain the lifestyle that you desire in your retirement years.

Information Gathering

Gathering all of the information you will need to develop your plan is the next step. Investment plans, investment advisers, interest rates, dividend rates, payout rates from mutual funds, retirement plans, current expenses and costs for everything from heating your home to budgets for groceries etc should be considered. Use several simplifying assumptions to make it easier and use a program or work with an adviser to completed your retirement plan strategy.

Retirement Income Strategies – Taking Action

Once you have a plan, most likely you will find that you need to make some changes. They could include focusing on paying off your home faster, saving more money for retirement that you planned, reducing your expenses etc. The important thing is to begin taking action now to ensure that your retirement strategy, goals and objectives can be met.

Reviewing and Updating

Once you have completed all of these steps some people will feel that they are done and can afford to sit back and relax until they retire. This is not true. Our lives change, we retire earlier or later than planned, we have more expenses than planned, inflation is higher, our goals may change and on and on. At the very least review your retirement strategy once per year and then update everything. You may find that your goals, savings plan etc may need to be adjusted slightly. You will want to ensure that you can enjoy the life you planned for in retirement.

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How much income will you need in retirement?

February 28th, 2014 ernie Posted in Retirement Income No Comments »

How much income will you need in retirementMany consumers want to know the answer to the question, “how much income will you need in retirement”? The common guideline for the amount of money or income that you will need during retirement has been an average of 70%. Most advisers will aim for that number based on the fact that most people will not need as much money to live on during retirement. After all they do not have the expenses of going to work, their mortgage should be paid off, and all of their debt including car loans should also be reduced to zero. They also have less expenses for getting to and from work, less clothes etc.

How much income will you need in retirement – Spending More ?

They may have objectives of going on a vacation, visiting grandchildren, perhaps a once in a time life vacation. For many consumers this number of 70% is probably quite realistic if you exclude the once in a life time trip. However it may not work for everyone and it is important to understand what your situation is and how much money you will need once you retire.

For example the couple that is spending to the level of their paycheck each month just before retirement may have difficulty surviving on 30% less than they currently make. Unless they reduce their expenses they will quickly go into the hole and run up debt that they probably will not be able to pay for. They may be required to take another job, sell their home to cover expenses etc. This is not something that you want to find yourself needing to do.

Plan for Retirement

If you are nearing retirement now is the time to complete an assessment of how much income you will actually have during your retirement taking into account employment pensions, government pensions and income from savings. At the same time evaluate all of your expenses to understand which ones will continue during retirement and those that will be reduced.

Once you have these two numbers you will be able to quickly understand weather 70% of your income is realistic or not. Don’t forget to include one of a time expenses such as vacation, supporting children, and health issues that may increase the 70% requirement of your income. There is also an age factor to take into account as well. When you initially retire and have your health, there are more opportunities to spend your money on the fun things you like to do. As you age, you may have to gove some things up and switch to others that actually cost less. The big unknown is what will your health care cost and how much will you need to pay for the level of care that you need?

For more information about retirement income and how much you will need in retirement, click here.

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Retire early: a second paycheck comes in handy

January 30th, 2014 ernie Posted in Retirement Income No Comments »

second paycheckMany people dream of retiring early and enjoying the good life. The reality is though that there are a number of reasons why people cannot retire early. For example they may not have sufficient savings, they may still have children going to university and college, they may not want to retire and in fact would prefer to continue working to maintain their social life.

The second paycheck comes in really handy and augments the family income. This same income can be used to enhance your savings and prepare for the quality of life that you would like to have during retirement. It also keeps your hand in the business and keep you current with what is going on in your career area. Many people will move from the regular career oriented job, into a new consultant type job for a number of years after they retire.

The question that many people ask themselves is what kind of a job should they consider after they retire. There are several schools of thought about these jobs. For example if you would like to continue in the same career that you’re in, there are many consulting type jobs that may be available within your industry.

Other people would prefer to try something brand-new and only work for several days or maybe 20 to 30 hours a week. This will give them time to pursue some of the other things they like to do that they could not do until they were retired. Either way they have income coming in.

What Second Paycheck or Job do You Want

While some of these jobs may not be as challenging and as interesting as the job they had during their career, it still gives them an opportunity to get out of the house and an opportunity to meet people as well. If you try something outside your career experience it is also a learning activity for you.

Many colleagues of ours have very specific requirements about getting a second job after they retire. Yes you want the money, but also there are some specific issues that they have concerns about.

For example many people want to get away from the office politics. They just want to do the job and leave when the job is finished. They don’t want to become an employee, preferring to work as a consultant with a specific start date to the contract and a specific end date to the contract.

Many other people would prefer to work in retail where they have specific hours that they work everyday and then are finished with no issues or politics to be be concerned about at the job. When they leave the store their finish for the day and don’t think about it again until they come back the next day or whenever the next shift is scheduled.

If you’re looking for a second paycheck we urge you to think about and plan the kinds of jobs that you would like to pursue to make sure that your objectives are being met, whether it’s additional income, a social life, something interesting and challenging to do or something just to fill the time that you now have available.

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