Retirement

(The Church of Jesus Christ of Latter-day Saints, 2017)

In the previous chapter, we learned that investing is putting time, effort, or money into something and expecting some type of return. One of the reasons we may invest money is to have enough when we retire.

President Ezra Taft Benson taught, “As you move through life toward retirement and the decades which follow, we invite all … to plan frugally for the years following full-time employment”(The Church of Jesus Christ of Latter-day Saints, 2014). There may be government or social programs available to help you during retirement, but you will likely need to supplement the money available from these programs with your own savings or investments. If you fail to plan now, you may not have enough income or savings to be self-reliant after you retire.

Envision Your Retirement

(U.S Department of Labor, 2015)

Make retirement a priority! This needs to be among your goals regardless of your age. Some goals you may be able to borrow for, such as college, but you can’t borrow for retirement. 

Retirement is a state of mind as well as a financial issue. You are not so much retiring from work as you are moving into another stage of your life. Some people call retirement a “new career.”  

What do you want to do at that stage? Travel? Relax? Move to a retirement community or to be near grandchildren? Pursue a favorite hobby? Go fishing or join a country club? Work part-time or do volunteer work? Go back to school? What is the outlook for your health? Do you expect your family to take care of you if you are unable to care for yourself? Do you want to enter this stage of your life earlier than the normal retirement age or later? 

The answers to these questions are crucial when determining how much money you will need for the retirement you desire – and how much you’ll need to save between now and then. Let’s say you plan to retire early, with no plans to work even part-time. You’ll need to build a larger nest egg than if you retire later because you’ll have to depend on it far longer  

Start now

(The Church of Jesus Christ of Latter-day Saints, 2017)

Once you have established an emergency fund and paid off your consumer debt, you should begin saving for retirement as soon as possible. The sooner you begin saving for retirement, the longer your money has to grow and the more money you are likely to have available for retirement.

(U.S Department of Labor, 2015)

Retirement probably seems vague and far off at this stage of your life. Besides, you have other things to buy right now. Yet there are some crucial reasons to start preparing now for retirement. You’ll probably have to pay for more of your own retirement than earlier generations. The sooner you get started, the better. 

You can start small and grow. Even setting aside a small portion of your paycheck each month will pay off in big dollars later. Company retirement plans are the easiest way to save. If you’re not already in your employer’s plan, sign up. You can afford to invest more aggressively. You have years to overcome the inevitable ups and downs of the stock market. Developing the habit of saving for retirement is easier when you are young..

(U.S Department of Labor, 2021)

If you are already saving, whether for retirement or another goal, keep going! You know that saving is a rewarding habit. If you’re not saving, it’s time to get started. Start small if you have to and try to increase the amount you save each month. The sooner you start saving, the more time your money has to grow (see the chart below). Make saving for retirement a priority. Devise a plan, stick to it, and set goals. Remember, it’s never too early or too late to start saving.

Compound interest

The main reason for starting your savings as early as possible is compound interest. There are two common ways in which interest is calculated, simple and compounding. 

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Simple interest is calculated only on the initial principal amount. The interest earned each period is constant and does not change over time. For example, if you invest 1000 at an annual interest rate of 5%, with simple interest, you would earn $50 in interest every year ($1000 * 0.05) even though the amount of the account is growing over time.

(The Church of Jesus Christ of Latter-day Saints, 2017)

Compound interest can be one of the keys to having enough money for retirement. Compound interest is earning additional interest on interest, and it is typically represented as a percentage or rate of return. Once you earn your first interest payment, it is added to the principal balance. Then that larger balance continues to grow.

(The Office of Financial Readiness, 2020)

Compound interest is the cycle of earning interest on interest! Here is an example to help illustrate the power of compound interest and why it’s important to start early. Pressy, Mandi, and Steve all want to save for retirement. Pressy starts at age 20 saving $200 per month. Mandi starts at age 25 saving the same $200 per month. Steve waits until age 35 and tries to play catch-up by saving $400 per month. Assuming the same 8% rate of return for each of them, see the chart below for their results. Even though Pressy only saves $12,000 ($2,400 for 5 years) more than Mandi, she ends up with over $350,000 more by age 65. Steve, by age 65 has significantly less than both despite trying to save more.

Estimate How Much You Need to Save for Retirement

(U.S Department of Labor, 2015)

Now that you have a clearer picture of your retirement goal, it’s time to estimate how large your retirement nest egg will need to be and how much you need to save each month to buy that goal. This step is critical!

The vast majority of people never take this step, yet it is very difficult to save adequately for retirement if you don’t at least have a rough idea of how much you need to save every month. There are numerous worksheets and software programs that can help you calculate approximately how much you’ll need to save. Do an online search for resources applicable to you. Professional financial planners and other financial advisors can help as well. 

Here are some of the basic questions and assumptions to keep in mind when thinking about your retirement.

How much retirement income will I need?

An easy rule of thumb is that you’ll need to replace about 80 percent of your pre-retirement income. If you’re making $50,000 a year (before taxes), you might need about $40,000 a year in retirement income to enjoy the same standard of living you had before retirement. Think of this as your annual “cost” of retirement. 

However, no rule of thumb fits everyone. Expenses typically decline for retirees: taxes are smaller (though not always) and work-related costs usually disappear. But overall expenses may not decline much if you still have a home and other debts to pay off. Large medical bills may keep your retirement costs high. Much will depend on the kind of retirement you want to enjoy. Someone who plans to live a quiet, modest retirement in a low-cost part of the country will need a lot less money than someone who plans to be active, take expensive vacations, and live in an expensive region. 

For younger people in the early stages of their working life, estimating income needs that may be 30 to 40 years in the future is obviously difficult. Every year or two, review your retirement plan and adjust your retirement savings estimate as your annual earnings grow and your vision of retirement begins to come into focus.

How Long Will I Live In Retirement?

Based on current estimates, a U.S. male retiring at age 65 today can expect to live approximately 19 years in retirement (age 84). A female retiring today at age 65 can expect to live approximately 21 years (age 86). These are average figures for the U.S. and may be different for your situation. 

How long you can expect to live will depend on factors such as your general health and family history. But using today’s average or past history may not give you a complete picture. People are living longer today than they did in the past, and virtually all expert opinion expects the trend toward living longer to continue.

Will you have other sources of income?

When it comes to income sources in retirement, the more, the merrier. As we discussed in the prior chapter about diversification in your investments, the same is true for retirement income sources. It would be great to have saved up everything you need in retirement yourself, but it would be great to have other income streams as well. 

Look into what resources your country provides. Does your government have a retirement income plan like Social Security in the United States or the Canada Pension Plan in Canada? Are you currently qualified for the benefits? If not, what do you need to do to be able to rely on those resources? 

What if you also had the capability of renting another home you own to have consistent rental income? Investing in rental properties to generate passive income through rental payments from tenants can provide a steady cash flow and potential long-term appreciation of property value.

What adjustments must be made for inflation?

(U.S Department of Labor, 2015)

The cost of retirement will likely go up every year due to inflation -- that is, $40,000 won’t buy as much in year 5 of your retirement as it will the first year because the cost of living usually rises. Estimates of how much income you need each year – and how much you’ll need to save to provide that income – must be adjusted for inflation. When planning for your retirement it is always safer to assume a higher, rather than a lower, rate and have your money buy more than you previously thought.

What will my investments return?

Any calculation must take into account what annual rate of return you expect to earn on the savings you’ve already accumulated and on the savings you intend to make in the future. You also need to determine the rate of return on your savings after you retire. It’s important to choose realistic annual returns when making your estimates. Most financial planners recommend that you stick with the historical rates of return based on the types of investments you choose or even slightly lower.

How much should I save each month?

Once you determine the number of years until you retire and the size of the nest egg you need to “buy” in order to provide the income not provided by other sources, you can estimate how much you need to save each month. It’s a good idea to revisit this number at least every year or two. Your vision of retirement, your earnings, and your financial circumstances may change. You’ll also want to check periodically to be sure you are achieving your objectives along the way.

How to prepare for retirement when there’s little time left

(U.S Department of Labor, 2015)

What if retirement is just around the corner and you haven’t saved enough? Here are some tips. Some are painful, but they’ll help you toward your goal. 

• It’s never too late to start. It’s only too late if you don’t start at all.

• Sock it away. Pump everything you can into your savings. Try to put away at least 20 percent of your income.

• Reduce expenses. Funnel the savings into your nest egg.

• Take a second job or work extra hours.

• Make sure your investments are part of the solution, not part of the problem. To boost your returns, diversify your holdings and keep an eye on fees. But don’t take risks you can’t afford and don’t trade too much.

• Retire later. You may not need to work full-time beyond your planned retirement age. Part-time may be enough.

• Refine your goal. You may have to live a less expensive lifestyle in retirement. 

• Make use of your home. Rent out a room or move to a less expensive home and save the profits. 

• Sell assets that are not producing much income or growth, such as undeveloped land or a vacation home, and invest in income-producing assets.
  

Using Employer-based retirement plans

Does your employer provide a retirement plan? If so, say, retirement experts … grab it! Employer-based plans are the most effective way to save for your future. What’s more, you may gain certain tax benefits. In the United States, employer-based plans come in one of two varieties (some employers provide both): defined benefit and defined contribution. These may not be directly applicable to your situation but you may find comparable plans where you live.

Defined Benefit Plans 

These plans pay a lump sum upon retirement or a guaranteed monthly benefit. The amount of payout is typically based on a set formula, such as the number of years you have worked for the employer times a percentage of your highest earnings on the job. Usually, the employer funds the plan – commonly called a traditional pension plan – though in some plans workers also contribute. Most defined benefit plans are insured by the federal government. 

Defined Contribution Plans 

(U.S Department of Labor, 2015)

The popular 401(k) plan is one type of defined contribution plan. Unlike a defined benefit plan, this type of savings arrangement does not guarantee a specified amount for retirement. Instead, the amount you have available in the plan to help fund your retirement will depend on how long you participate in the plan, how much is invested, and how well the investments do over the years. The federal government does not guarantee how much you accumulate in your account, but it does protect the account assets from misuse by the employer.

How to make the most of a defined contribution plan

• Study your employee handbook and talk to your benefits administrator to see what plan is offered and what its rules are. Read the summary plan description for specifics. Plans must follow federal law, but they can still vary widely in contribution limitations, investment options, employer matches, and other features. 

• Join as soon as you become eligible. 

• Put in the maximum amount allowed. 

• If you can’t afford the maximum, try to contribute enough to maximize any employer matching funds. This is free money! 

• Study carefully the menu of investment choices. Some plans offer only a few choices, while others may offer hundreds. The more you know about the choices, investing, and your investment goals, the more likely you will choose wisely. 

• Many companies match employee contributions with stock instead of cash. Financial experts often recommend that you don’t let your account get overloaded with company stock, particularly if the account makes up most of your retirement nest egg. Too much of a single stock increases risk. 

• Plan fees and expenses reduce the amount of retirement benefits you ultimately receive from plans where you direct the investments. It’s in your interest to learn as much as you can about your plan’s administrative fees, investment fees, and service fees. Read the plan documents carefully.

Impact of retirement on your financial plan

(ChatGPT, 2024)

Retirement planning plays a pivotal role in your financial plan, as it ensures long-term financial security and stability during an exciting yet vulnerable time of life. By actively preparing for retirement, you can effectively manage your savings, investments, and expenses to meet future needs and aspirations. Planning ahead allows for the accumulation of sufficient retirement funds through vehicles like employer-sponsored plans and personal savings, ensuring a comfortable lifestyle post-employment. Strategic retirement planning enables you to account for potential healthcare costs, inflation, and unforeseen expenses, mitigating financial risks in retirement. 

Beyond financial considerations, retirement planning also involves envisioning desired lifestyles, goals, and activities during retirement, facilitating a smoother transition into this phase of life. Integrating retirement planning into your financial plan provides peace of mind, empowering you to pursue your passions, enjoy leisure time, and maintain financial independence throughout your retirement years.

Prayerful Consideration

Retirement planning can be complex, with many moving pieces. Prayerfully consider how these principles can best be applied to your unique situation. 

Planning for when you are gone

When we enter this life, one of the sure things we will experience is leaving life by experiencing death. Thinking about the ones you leave behind before you pass away is one of the greatest gifts you can leave behind. Your loved ones will be grieving their loss and the last thing anyone would want to do in that situation is dig through files looking for important documents or passwords to accounts. The process of arranging and managing your assets and affairs during your lifetime to help those you leave behind is called estate planning. 

While there are various legal and tax systems to navigate through, some of the most important principles of estate planning come from the root of attempting to make your desires for your assets as clear as possible so those you leave behind don’t run into issues. Proper estate planning can be a real blessing to those you care about most. 

Lack of good estate planning has the potential to tear apart families after you are gone due to relatives arguing over money or possessions. Making your wishes clear through documentation and working with third-party witnesses can help clarify any disagreements that may arise. Here are some questions to consider when thinking about estate planning:

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• What are my assets? Make a list of all your assets, including real estate, investments, retirement accounts, bank accounts, life insurance policies, and personal property.

• Who are my beneficiaries? Identify the individuals or organizations you want to inherit your assets. Consider how you want your assets distributed among your family members, friends, charities, or other entities.

• Do I have minor children or dependents? If you have minor children, think about who you would want to serve as their guardian if you and their other parent were unable to care for them.

• Are there specific items or sentimental belongings I want to pass on to certain individuals? Consider any sentimental or valuable items you want to designate for specific beneficiaries.

• Do I have any debts or liabilities? Determine if you have outstanding debts or liabilities that need to be addressed in your estate plan, such as mortgages, loans, or credit card debt.

• Who will manage my affairs if I become incapacitated? Think about who you would trust to make financial and healthcare decisions on your behalf if you were unable to do so yourself.

• What are my wishes for end-of-life care? Consider your preferences regarding medical treatment, life support, and other end-of-life decisions.

• Have I updated my estate plan to reflect major life changes? Regularly review and update your estate plan to account for changes in your family situation, financial circumstances, and relevant laws.

• Do I have any charitable intentions? Consider if you want to leave a legacy through charitable giving or philanthropic endeavors and how you can incorporate these goals into your estate plan.

These questions can serve as a starting point for your estate planning process and help ensure that your estate plan accurately reflects your wishes and priorities. Consulting with legal and financial professionals experienced in estate planning can provide further guidance and assistance tailored to your specific needs and circumstances.

While it is never fun to face the possibility of death, estate planning should not be delayed. It may not ever feel urgent but it is important to have plans and instructions in place because we never know what can happen. 

While estate planning usually is indicative of death, it doesn’t necessarily have to be that way. There are countless examples of circumstances where individuals became incapacitated in some way and were unable to continue with the management of their family finances. By staying organized and letting your spouse or other family members know where to find your important information and documents, they will be able to help as needed regardless of the situation.

Estate planning impact on financial plan

(ChatGPT, 2024)

Estate planning is a critical component of your financial plan, as it profoundly influences how your assets are managed and distributed during and after your lifetime. By carefully crafting an estate plan, you can ensure that your wealth is transferred to intended beneficiaries efficiently, minimizing the burden of taxes and administrative expenses. 

Moreover, estate planning allows you to protect your assets and provide for your loved ones, including spouses, children, and dependents, according to your wishes. It also enables you to plan for contingencies such as incapacity, ensuring that trusted individuals are empowered to make financial and healthcare decisions on your behalf. Estate planning can foster peace of mind, knowing that your legacy and values will be preserved and carried forward. Integrating estate planning into your financial plan helps you achieve your long-term financial goals, protect your wealth, and leave a lasting impact on future generations.

Prayerful Consideration

No one likes thinking of the end of their life, but it is important to have a plan in place for those you leave behind. Prayerfully consider how these principles can best be applied to your unique situation. 

References

ChatGPT (Version 3). (2024). [AI]. Open AI. https://chat.openai.com/auth/login

The Church of Jesus Christ of Latter-day Saints. (2014). Teachings of Presidents of the Church: Ezra Taft Benson. The Church of Jesus Christ of Latter-day Saints.

The Church of Jesus Christ of Latter-day Saints. (2017). Learn—Maximum Time: 45 Minutes. In Personal Finances for Self-Reliance. https://www.churchofjesuschrist.org/manual/personal-finances-for-self-reliance/9-managing-financial-crises/learn-maximum-time-45-minutes?lang=eng

The Office of Financial Readiness. (2020). Basic Investing. In Touchdown Curriculum. https://finred.usalearning.gov/assets/downloads/Basic%20Investing.pdf

U.S Department of Labor. (2015). Saving Fitness: A Guide to Your Money and Your Financial Future. CreateSpace Independent Publishing Platform. https://www.dol.gov/sites/dolgov/files/ebsa/about-ebsa/our-activities/resource-center/publications/savings-fitness.pdf

U.S Department of Labor. (2021). Top 10 Ways to Prepare for Retirement. CreateSpace Independent Publishing Platform. https://www.dol.gov/sites/dolgov/files/ebsa/about-ebsa/our-activities/resource-center/publications/top-10-ways-to-prepare-for-retirement.pdf