(HawaiiNewsNow) - Much like a successful life, a successful retirement plan does not happen by accident. It happens with careful and thoughtful steps followed well before retirement occurs. Here to talk about the choices we make towards getting to a comfortable retirement is Bank of Hawaii Vice President Richard Oshiro.
A few weeks ago you talked about how investors should behave in their planning process to get to a comfortable retirement and also the benefits of starting early. How do investors know if they are on track? How does someone start planning?
Effective financial planning should always revolve around your family and values and can be quite an emotional exercise for some as the decisions you make or don't make could affect the people you love and the things you care about. A key starting point is to focus on answering three questions that will help layout the preliminary framework for getting to your retirement nest egg number.
1. What kind of retirement lifestyle do you want?
a. Your answer has to be a specific number which means you need to do some budgeting and financial homework and you should also write your goals out and include both financial and non financial desires.
2. When do you want to retire?
a. I touched upon this subject last time in that if you retire earlier, you'll have a shorter period of time to invest, and subsequently a longer period of time that your savings will need to last.
3. How long do you think you will last?
a. For planning purposes, it is not uncommon to assume living to age 90 and beyond – plus if your family has a history of longevity, you should probably plan on your good genes keeping you alive just as long as aunty, uncle and tutu, and potentially even longer?
Finally, inputting your answers into a retirement calculator will give you a good ballpark number to target.
So how big a number are we talking about?
Let's say you are 70 years old right now and want to keep the same $40k to $100k lifestyle in retirement that you are currently used to. You would need to have roughly $900K to $2.3MM of cash flow and savings to your name to live to 100 years old. Also note that the numbers I've given you assume that during retirement, you may be required to continue to invest to keep up with inflation.
That sounds like a lot of money. How would I get there if I don't want to take too much risk?
You could take a conservative approach and use things like bond mutual funds. You'll experience potentially less fluctuation in your nest egg, but also experience lower earnings, which means that you'll need a lot more money put toward investing annually to keep the same lifestyle in retirement. Another approach would be to use investments like stock mutual funds that could experience significant fluctuations but return potentially higher earnings over the long run. Coupled with the advantage of time as we saw two weeks ago, could be a considerable difference from the very conservative approach. Of course, the prudent choice for most investors would be a diversified mix somewhere in between those extremes.
That seems like a wide variety of results to choose from, almost too many?
The beauty of the planning process is that you have choices and you should select the best long term course that will help you take care of your family and your health for the long run with least amount of risk. Lastly, we'll all be affected by events during our lifetime that could change our goals and priorities significantly, so it is important to remember that retirement planning is an on-going process and should be revisited on a regular basis, like around your birthday – a year older and financially wiser.
