10 Tips to Help Strengthen Your Retirement Plan
Although finding a good personal financial planner is hard, there are some things you can do on your own to strengthen your retirement plan. Here are ten tips on how to get your retirement plan in better shape:
Tip #1: Calculate your expected retirement income
You can use either the Quicken 2014 retirement income calculator or an online retirement planning tool to calculate how much monthly income retirement savings may provide you during retirement. It's important to know this number so you can start thinking about any adjustments you may need to make in case this number doesn't work.
Tips #2 and #3: Plan to save more and work longer
If your retirement planning calculations show you are anticipating a shortfall, you have only two options — save more or work longer — and you may as well plan now to use both.
First, you’ll want to figure out a way to save more as soon as you can (even if, and maybe especially, if this requires cutting your spending).
Second, you probably want to plan to work longer because that’ll make a big difference in the way the compound interest numbers work.
Tips #4 and #5: Use a target retirement fund and minimize investment costs
You can simplify your long-run retirement savings by using an inexpensive target retirement fund, such as Vanguard Group or USAA target retirement funds.
Using a target retirement date fund can help you avoid all of the terrible mistakes that some of your friends may make in the coming decades by putting together a diversified portfolio of stocks, bonds, and cash.
Furthermore, using a target retirement fund from one of the big, low-cost providers like Vanguard or USAA will mean you avoid the scourge of investors: investment costs that mercilessly eat up a huge chunk of your annual investment income.
Here’s a weird thing, too, that many people miss: In an economy where your savings are earning, say, 5 percent, giving up 1 percent in investment advisory fees is like an extra 20 percent tax. That is brutal.
Tip #6: Don’t break the bank for your kids college
A quick point: Don’t screw up your retirement plans so your kids can go to some expensive school.
Your kids have other options. Their worst case scenario, for example, may be two years at a local community college and then part-time night school. With a little bit of luck, either the local school district or an employer may pay for some or all of this.
You may want something different than this for your kids, but sometimes their worst case scenario isn't really a bad scenario at all.
The option of you not saving for retirement so your kids can splurge on college seems terrifying.
Tip #7: Save all of any windfalls
Many of us will at some point receive a windfall. By saving this money into a retirement account, you'll simply spend the money over the years you don’t work, rather than all at once.
Tip #8: Try to get long-term disability insurance
If you’re working and your family depends on those earnings to live, you probably should have some long-term disability insurance. It's something that'll keep the refrigerator stocked and the lights on even if you, for example, get hurt and can no longer work.
By the way, the chances that this will actually happen are very low, but that’s why the insurance is so cheap. For example, consider someone who paid a couple of hundred bucks a year for a policy that would give him $48,000 a year in tax-free income if he could no longer work.
Tip #9: Get some cheap term life insurance
If you’re working and a family depends on your earnings, you also want some cheap term life insurance. But don’t buy whole life or universal life. You want cheap term insurance — enough to cushion the effect of your family losing your paycheck for a few years.
A couple of notes, though, so you don’t waste money here. Note that if you’ve got children, they will presumably receive rather generous survivors’ benefits from the Social Security Administration — potentially a few thousand dollars a month until they finish high school.
Further, note that when your family is grown, you can probably drop the insurance. You don’t need insurance when nobody depends on your paycheck.
Tip #10: Have a will
Finally, you should have an up-to-date will that describes how you want your assets distributed. And, more importantly, if you have young children, you need to provide instructions as to who will take care of them in a worst case scenario.