Planning Your Journey Up and Down the “Retirement Mountain”
I wrote recently in The Hill about how retirement is like climbing a mountain. The peak of the mountain is your retirement date, and the ascent is the struggle to earn and save along the way. I spoke of each part of the journey to the top of the mountain and how to best prepare during each decade of your life:
In your 20s: Set the financial foundation for the rest of your life. Create healthy savings habits by setting strict rules for yourself. I recommended following the 70/20/10 rule — 70 percent of your income on living expenses, 20 percent saved for retirement, and the remaining 10 percent goes to build an emergency fund.
In your 30s: Don’t get caught up in “keeping up with the Joneses.” Don’t overreach when buying a house or a car. Hold to the 70/20/10 rule. Look also to protection for your loved ones in the form of disability and life insurance.
In your 40s: If you are like most people, your income will peak between the ages of 40 and 50. Expect your expenses to increase as well, especially with children learning to drive or entering college. This is a good time to sit down with your financial adviser to ensure you are still on the right track.
In your 50s: The peak of the mountain is in sight. At this point in many people’s lives, their children are out of college and their mortgage is paid off. This is an opportunity to increase your retirement savings, as you have time to catch up if you need to. Cut back on high-interest debt. Start thinking about planning the specifics of your retirement.
In your 60s: In mountain climbing, the last few hundred feet can be the toughest. Many times, you think you are at the top, only to come over a ridge and realize there is still more to climb. So it is with retirement. People are living longer and are still productive at work late into their 60s and 70s. Don’t be discouraged if you haven’t reached your financial goals at this point. There is still time left to earn and save as much as you can.
Of course, getting to the top of the mountain is only half the journey. Once you reach the top, you still have to work yourself safely down. Yet, when it comes to retirement, most advice tends to concentrate on building up your retirement savings. It’s equally important to have a strategy for how you spend down your savings during retirement.
Here are a few things to plan for on your journey back down the retirement mountain:
- You should plan for a long retirement. According to the Society of Actuaries, a couple aged 65 has a 43 percent chance of at least one of them living to the age of 95, so your spend down has to be managed just as carefully as the build up. You can test out your own life expectancy on the Society’s Longevity Illustrator.
- Your expenses are not likely to change. If anything, they may even increase, as you take those exotic trips you always promised yourself once you retired. A good rule of thumb is that you will need 70 to 80 percent of your pre-retirement gross income. Over time, inflation will also cause many of the expenses in your life to increase. With three percent inflation, the purchasing power of a $50,000 annual income is halved in 20 years.
- Make sure to diversify your retirement income sources. Most retirement advice has people maximizing their 401(K) contributions, but that may not be the right strategy for everybody. Distributions from such accounts are usually taxable, and they are treated as ordinary income, so the required distributions oftentimes trigger undesirable tax liabilities. Your financial adviser might be able to suggest a variety of other ways to ensure a reliable income stream during retirement.
Planning for your journey before and after retirement is essential. No matter where you are in the process today, it’s never too late to begin planning for financial independence. By maintaining healthy saving habits and sticking to a financial plan, anyone can retire and begin the journey down the mountain.