You are standing in the home improvement center and your spouse is looking at the granite countertops and hand rubbed finish cabinetry. The stainless steel appliances are gleaming under the recessed lights in the showroom. The imported ceramic tile backsplash is angled to project an intricate pattern of colors that complete the entire ensemble. Marble floor tiles are displayed with a variety of finishes and colors to complement the entire makeover. Your brow starts to sweat as the project grows larger with each enhancement and you start to wonder, how much is this going to cost? Retirement is no different.
Everyone has a different retirement vision. Some people want to travel and some want to spend more time on hobbies, golf, charitable events or volunteer work. Yet according to the 2009 Employee Retirement Benefits Institute study, only 4 out of 10 people have ever calculated what it is going to cost them to retire.1 It is ironic that people will spend more time planning their summer vacation than figuring out what it will take to retire in the fashion they desire. Vacations and retirement can vary significantly from one person to another.
Vacations can vary from going for a day trip to a public park to going on an extensive cruise for months at a time. Having some idea of what you want to do with your retirement years ahead of time prepares you for your journey. Over the last 15 years as a financial advisor, I have seen people work their entire lives and then all of the sudden they retire and are bored. So retirement is not just a financial transformation but can be an emotional transformation as well. What suits one person is not even of interest to someone else. Spending some time reflecting on what you would be doing if you didn’t have your day job is time well spent. So that when the time comes for you to retire, you allocate time and resources to what you truly believe are important to you. So how much is this going to cost me?
With life expectancy growing each and every year, most people should plan on being around longer than they would have anticipated. Even an inflation rate of 3% over 30 years of retirement means that the cost of living will almost double over the course of time. So you have to own enough investments in your portfolio that have the potential to help offset inflation. By adding fixed income or bonds to your portfolio, you can provide cash flow for retirement expenses. So bonds can be viewed as a source of income in retirement. There is an appropriate allocation for every level of risk, which is based on each person’s unique situation. So how much is this going to cost me?
Your home is usually the single largest investment. Planning to downsize in retirement can free up additional investment capital that can be reinvested for income and some potential growth in an attempt to offset inflation. This can complement a pension, social security, or healthcare costs that have been pushed back on the retiree from their former employer during retirement. Healthcare costs can be a big moving part in looking at your retirement cash flow.
I believe cash flow is the most important part of any financial plan. It is the biggest moving part and has the most dramatic impact on creating different scenarios for clients. The bigger the spending habits, the greater capital required and the higher required rate of return to facilitate a secure retirement. Keeping an accurate budget on what you are spending today and in retirement will increase your odds of being able to forecast what your needs are in the future years. I always like to group expenses into two different categories, essentials and discretionary. Food and shelter are obviously essentials while the amount you will spend on hobbies, travel, and gifts are discretionary. I believe they are both equally important to have a satisfying retirement.
A retirement that provides an income, you financial independence and dignity is the ultimate financial goal. It makes you want to ask, how much this is going to cost me.
Stocks offer long-term growth potential, but may fluctuate more and provide less current income than other investments. An investment in the stock market should be made with an understanding of the risks associated with common stocks, including market fluctuations.
Investing in fixed income securities involves certain risks such as market risk if sold prior to maturity and credit risk especially if investing in high yield securities, which have lower ratings and are subject to greater volatility. All fixed income investments may be worth less than original cost upon redemption or maturity. Bond prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline of the value of your investment.
1The Employee Benefits Research Institute 2009 survey can be accessed at www.ebri.org
By: Joseph G. Budd, Managing Partner, CFP, ChFC
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Joseph Budd is a Managing Partner and CERTIFIED FINANCIAL PLANNERTM professional with Budd, Melone & Co. LLC. Joe can be reached toll free at 877-293-5830.
Wells Fargo Advisors Financial Network did no assist in the preparation of this report, and its accuracy and completeness are not guaranteed. The opinions expressed in this report are those of the author and are not necessarily those of Wells Fargo Advisors Financial Network or its affiliates.
Investment products and services are offered through Wells Fargo Advisors Financial Network, LLC. Budd, Melone & Co. LLC is a separate entity from WFAFN. © 2009 Wells Fargo Advisors Financial Network, LLC. All rights reserved. 1209-3588.
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