Retirement: Preconceived Notions
Email This Article Nathaniel RitchisonJuly 15th, 2010
RETIREMENT INCOME’S FUTURE
One of the foundational tasks of building a sound financial future is preparing for retirement. That means developing an income stream or streams that will cover all living expenses regardless of whether there is earned income. In this letter, I would like to address some of the preconceived notions about retirement income that are prevalent in this country, whether or not they are valid, and how they can be used to help prepare for retirement. There are three main places from which people could receive a retirement income: personal savings and investments, employer sponsored plans, and Social Security. Every retiree should address each of these three areas and make sure they receive retirement income from each one at the age that is going to work best for their income needs. We’ll start with the retirement income you have the least control over (Social Security) and finish with what you have the most control over (personal savings and investments).
PRECONCEIVED NOTIONS
The first preconceived notion some retirees have is that “Social Security will take care of my retirement needs.” As most people know today, Social Security is meant only as a supplement and that is why workers have only 6.2% drawn out of their paychecks to provide for it. At most, it should be planned to provide about a third of retirement income for a family. There are two main pieces to Social Security that are under each person’s control. One is the life-time income on which their Social Security income is based and second is the age at which Social Security is received. The latter has to be planned very carefully as it will impact retirement income for a lifetime. Taken too early, a retiree might end up sacrificing retirement income that could be retained.
The second preconceived notion is that “my employer will take care of my retirement.” While that may have been the case fifty years ago, today’s retirement marketplace and shifting economy places the burden for saving for retirement firmly on the employee’s shoulders. Most companies will offer a plan to employees but require the employees to make contributions from their own paychecks in a 401k type plan and may or may not (depending on business conditions), make a partial matching contribution. At most, this should be about a third of retirement income as well.
THIRD, AND MOST IMPORTANT
The final piece is personal saving and investment and this is where pre-retirees have the most control but also can get the most confused. The common preconceived notion is that “I’ll always have more time to save.” From the very first day that someone starts working, a three part-plan needs to be in place that addresses Social Security, the employer-sponsored plan, and a personal savings plan that can be ramped up as income increases from year to year. Because of its higher growth potential and tax efficiency, the personal savings and investment income should comprise 50% of your retirement income. It is a daunting task to put a personal savings plan into place that is tax-efficient, has good long-term growth, and is manageable by the pre-retiree. That is why having a qualified “coach” like a Certified Financial Planner™ can be invaluable in helping to structure the right retirement income plan and integrating all three retirement income sources.