Money IQ

How Comfortable is Your Nest Egg?

Accumulating a nest egg for retirement should be a priority for every working person regardless of age.

Whether you have 10 or 40 years to go before retirement, consistently contributing to a retirement savings plan can be the ticket to financial freedom for individuals entering the “2^nd” act of life.

Ask yourself what asset would make the biggest difference in your retirement years.

Some answers may be your home, 401k plans or other savings plans.

These are all good answers, but if you are reading this and not yet retired, the correct answer is:

The single largest asset you have to ensure a successful retirement is your continuing ability to generate income!

Taking full advantage of the income produced over your last few years of employment, be it five or 10 years, can make a significant difference in how financially prepared you are to enter into retirement.

Consider doing the following:

• Max out your 401lk contribution while you are still working. Especially, if your company plan matches. No sense in leaving free money on the table;
• Pick a retirement age and then create a plan that eliminates as much debt as possible before you retire;
• Consider buying long-term health care and similar plans while you are younger and the premium is lower;
• Review your estate plan with your attorney and make sure your provisions make as much sense now as when you first set up your plan;
• Have a detailed discussion of your finances with your children. Let them know now what you can continue to help with once you hit retirement age; AND
• Talk to your siblings about how your parents will be cared for once they hit the stage in their life where they are no longer independent. The added expense of supporting a child or a parent can turn out to be a difficult financial burden during your retirement years.                                                                                                                 

Let’s assume you are close to retirement. You have worked hard and are looking forward to many years of well-deserved leisure.

You have calculated your ongoing fixed expenses and the income needed to support those. You have also tried to account for unforeseen expenses that although unpredictable are necessary for your calculations. Have you looked at the costs of vacations and travel, hobbies, and grandkids?

Accurately identifying these expenses is difficult but necessary to determine an acceptable level of spending during retirement.

When it comes to calculating a proper level of income during retirement years, not everyone can rely on the “old” rule that “you will need only 80 percent of your current income during retirement.”

New retirees often start their retirements with some feeling of “pent-up” demand that increases their initial spending during the first several years.

Long-planned trips, vacations, and home improvements that have been set aside for too long are two examples that could make your first few retirement years more expensive than your plan.

Later in retirement, as we become more sedentary, extraordinary expenses could drop (although medical and long-term care expenses could rise) and 80 percent of pre-retirement income could be adequate.

These days identifying sources of retirement income is tricky! If you receive a pension or defined benefit income from your employer, consider yourself fortunate.

These types of retirement plans have become scarce due to the high expense of administering them, (think General Motors.)

Assuming Social Security (SS) income will be part of your income stream, selecting the proper time to begin benefits is critical to your plan.

Started too early, Social Security benefits can be penalized if you continue working prior to “Full Retirement Age” (FRA) as defined by Social Security.

As such, delaying SS benefits as long as you can up to the age of 70 provides “longevity” insurance to your retirement income plan as long as you have continuing income or other assets that can be depleted to replace those SS dollars.

Delaying SS until age 70 allows the annual benefit to increase by a current amount of 8 percent each year between FRA and age 70.

Delaying benefits accordingly can have advantages, especially if you stay healthy and longevity is prevalent in your family.

Health problems and/or income requirements might require you to start SS before FRA, but in any case, a delay in the start of benefits increases your income proportionately.

Discuss your options with a financial planner or Social Security representative to insure the best decision!

Editor’s note: John Brunett is the Chief Investment Officer for the LANB Investment Group. His background includes more than 18 years in the financial services industry. He has extensive experience in the areas of bank investment programs and financial planning. Tony Ornelas has been in banking and financial services since 1976 and has held numerous positions within the financial industry, including his current position as the Trust Investment Officer at LANB.

• Look for Money IQ every Wednesday in the Los Alamos Daily Post.