Do you have a master plan? Maybe it amounts to nothing more than this: You’re thinking of a date far in the future. If you had a calendar for that far-off year, you might take a thick marking pen and scrawl “Retire!” in red. Maybe you’d add some more exclamation points.
And that’s really not the worst start — though it’s not much of a plan. Getting ready for retirement is a years-long project that boils down to setting a financial goal and then saving for it.
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Following Elon Musk to success
Maybe, we all need an Elon Musk-style master plan for retirement: substantial but attainable.
“I love this idea,” says Annamaria Lusardi, an economist and academic director at the George Washington University School of Business. Everyone needs a plan for the future, she believes, because “everybody is going to have a future.”
An academic researcher who studies retirement and financial behavior, Lusardi says people need a detailed plan every bit as much as businesses do.
In fact, says Ethan Braid, founder of HighPass Asset Management in Denver, start treating your household like a business. Intel, the federal government, or you and your spouse and kids. “There’s no difference,” Braid says. “Everyone operates on one thing: cash flow.”
Then, follow these steps to develop your retirement master plan.
1. Set a goal
Make your retirement vision concrete and specific — not, “I’d like to retire someday.”
Forming a plan sounds almost too basic, but Lusardi says just the simple act of planning generates an average 3 times the amount of wealth compared with people who don’t plan. “Of course, people who plan are a certain type (of person),” she says. “But if you have a plan, a place to go and a compass to get there, chances are you are much more likely to reach the goal. And much more likely to change your behavior to reach that goal.”
Instead of wondering how you can accumulate enough to stop working, Lusardi recommends coming up with a specific plan, such as retiring at 65 so you can travel. Those details enable you to draw up a plan to get there.
2. Make a budget
Braid counsels clients to track spending in detail and then make a budget. Taking a hard look at your expenses and spending habits is like getting on a scale. “Don’t be afraid to do it!” Braid says. He keeps it simple but asks clients to audit their entire previous year, everything from fixed expenses to credit cards, pets, hobbies and even cosmetics. You have to see where all the money is going.
Tracking your spending gives you a clear picture of your monthly spend. Once you know that, you know how much cash you need to retire, Braid says. “Everybody’s expectation of a (desired) lifestyle is different,” he says. People’s tastes in wine, clothes, travel vary wildly, and you might want to ramp down spending in retirement.
Expenses change as we age. “Some expenses are adjustable,” Lusardi says, with some going down and some going up. The cost of going to work will drop while the amount of your own time will rise. If you’ve been paying for yardwork or household chores, you might jettison these expenses because you’ll have more time to do them yourself.
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3. Figure out your housing
Real estate is a huge factor in retirement, Braid says. “(There are so) many people with too much house, too big a house,” he says. “It’s worse now than ever before.” Low-interest loans, advertising and social media messaging have tempted people to buy too much house.
Retiring while still owing a lot of mortgage is definitely going to affect people’s financial futures. Lusardi says that high mortgage balances — substantial numbers of baby boomers are going into retirement owing half their mortgage — are a growing problem. The reasons: larger houses and smaller down payments.
People need to take a close look at what they’re spending money on, Braid says, and ask some hard questions:
- Do you need this?
- Do you want this?
- What’s the plan to get this paid off?
4. Get help, dump debt
You don’t necessarily need a professional, Lusardi says, but retirement decisions are complex. “There are lots of assumptions you have to make, lots of considerations,” she says. “I think it’s not a bad idea for those who find this daunting or haven’t done a budget or aren’t financially sophisticated to see an adviser.”
Professional help can help keep you grounded. A financial adviser can make sure your assumptions are reasonable, whether it’s how much you’re saving, or decisions around downsizing or relocating. Having a professional guide also is a great way to make sure you follow through. Lusardi likens an adviser to a GPS that helps you navigate difficult roads.
One of the best things people can do is reduce debt. “Make sure you pay off high-cost and high-interest debt as quickly as you can,” she advises. While you may not have enough to pay off a mortgage, be sure you have the income to meet the monthly payments.
Unlike the past, you have learn to be savvy both in managing finances — making sure your assets last a long time — as well as managing debt.
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