A financial checkup could help put your mind at ease
Fewer than 1 in 5 people have established a comprehensive financial plan for their retirement, according to a Fidelity Investments study. But even if you are among those who do, how do you know your plan will hold up in every insomnia-inducing scenario you envision? We checked with retirement experts, who say your retirement will likely turn out fine if the following statements are generally true.
1. Your income and spending are in balance.
If you don’t have more debt than you had a year ago and only modestly tapped into your savings for spending cash, you’re doing well. Here’s the test: If after the first year of retirement you were able to live comfortably on any guaranteed income streams (like pensions and Social Security) and less than 4 percent of your investments, you’re on solid footing. Studies have found that by following the “4 percent” rule of thumb, you are unlikely to ever deplete your retirement savings. Simply multiply the value of your holdings by 4 percent (or divide by 25) to get your safe spending number for the first year. If you have $250,000 in savings, for instance, you can use $10,000 of it in year one to supplement your other income sources.
2. You’re thoughtful about how you use your cash.
The test here is what you would do if you found yourself with unexpected extra money. For instance, what did you do with a stimulus check or tax refund you received in the past year? If you paid down credit card debt and any bills you’d fallen behind on first, you are a savvy spender. If those were covered, making sure you had adequate emergency savings (see below) was also a good move. But if extra cash goes right away to a splurge, it suggests you need to be more strategic and mindful about your finances.
3. You have enough cash to cover surprises and ride out a prolonged downturn.
Just as you keep an emergency fund during your working years, you need one in retirement to cover sudden expenses. “I like my clients to hold six months of living expenses in cash,” says Ashley Coake, a Radford, Virginia, financial planner.
4. You talk about your financial decisions.
Do you have close friends, family members or advisers you can be open with about money? Even if that person isn’t a financial whiz, discussing financial choices with a peer can improve your decision-making, according to a 2018 study conducted by academics in the U.S., Canada and England. Let’s say you receive a tempting offer in the mail. Your friends can help you sort out whether it’s truly a good deal. As you age you may become more susceptible to scams, making these conversations even more important.
5. You passed the March 2020 gut check.
Were you comfortable with your financial state during the economic slowdown and the free-falling stock market at the pandemic’s outset? Did you say to yourself, “I’ll be OK?” And if you are invested in stocks, were you able to keep your cool? If not, it’s a good idea to lower the percentage of stocks in your portfolio — but still stay invested in order for your portfolio to keep up with inflation. A good rule of thumb is to subtract your age from 100 (110 if you’re willing to take more risk) and hold that percentage in stock.
6. You get, or give yourself, an annual money checkup.
One healthy sign would be that you spent roughly the amount of money you thought you would. If you have investments, another sign would be that you’re happy with how your portfolio is performing. If there were any big variances from expectations (be they positive or negative), now’s the time to adjust your plan for the coming years. It’s also important to ask yourself whether any of your financial goals have changed. “The best way to know that your plan is on track is to do an annual review,” says Brad Bobb, a financial planner in Springfield, Illinois.
7. You are, as the millennials might say, pretty chill.
It’s a good sign if you aren’t stressed often about money and you have something left over at the end of the month for fun. Jill Gianola, a financial planner in Columbus, Ohio, puts it this way: “Your retirement plan is working if you like your life.”
by Karen Cheney | AARP