Most of us know it is smart to save money for those big-ticket items we really want to buy – a new television or car or home.
Yet you may not realize that probably the most expensive thing you will ever buy in your lifetime is your retirement.
Perhaps you’ve never thought of “buying” your retirement. Yet that is exactly what you do when you put money into a retirement nest egg. You are paying today for the cost of your retirement tomorrow.
The cost of those future years is getting more expensive for most Americans, for two reasons. First, we live longer after we retire – with many of us spending 15, 25, even 30 years in retirement – and we are more active.
Second, you may have to shoulder a greater chunk of the cost of your retirement because fewer companies are providing traditional pension plans. Many retirement plans today, such as the popular 401(k), are paid for primarily by the employee, not the employer. You may not have a retirement plan available at work or you may be self-employed. This puts the responsibility of choosing retirement investments squarely on your shoulders.
Unfortunately, just about 53 percent of all workers are earning retirement benefits at work, and many are not familiar with the basics of investing. Many people mistakenly believe that Social Security will pay for all or most of their retirement needs. The fact is, since its inception, Social Security has provided a minimum foundation of protection. A comfortable retirement usually requires Social Security, employer-based retirement plan benefits, personal savings, and investments.
In short, paying for the retirement you truly desire is ultimately your responsibility. You must take charge. You are the architect of your financial future.
That may sound like an impossible task. Many of us live paycheck to paycheck, barely making ends meet. You may have more pressing financial needs and goals than “buying” something so far in the future. Or perhaps you’ve waited until close to retirement before starting to save. Yet you still may be able to afford to buy the kind of retirement you want. Whether you are 18 or 58, you can take steps toward a better, more secure future.
That’s what this booklet is all about. The U.S. Department of Labor and Certified Financial Planner Board of Standards Inc. (CFP Board) want you to succeed in setting financial and retirement goals. Savings Fitness: A Guide to Your Money and Your Financial Future starts you on the way to setting goals and putting your retirement high on the list of personal priorities.
The Department of Labor’s interest in retirement planning stems from its desire to improve the security of American workers in retirement. In 1995, the Department launched its Retirement Savings Education Campaign. Saving is now a national priority, with the passage of the Savings Are Vital to Everyone’s Retirement Act of 1997 (SAVER). The Department continues to educate Americans about retirement savings.
CFP Board also has a keen interest in helping Americans meet their personal and financial goals. A nonprofit, certifying and standards-setting organization, CFP Board’s mission is to benefit the public by granting the CFP® certification and upholding it as the recognized standard of excellence for competent and ethical personal financial planning. To this end, CFP Board authorizes individuals who meet its competency, ethics and professional standards to use its trademarks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design), and in the U.S. CFP Board currently oversees more than 72,000 CFP® professionals in the U.S. who advise individuals and families on a broad range of personal finance topics, including retirement, budgeting, taxes, investments, estate planning, and insurance, among many others.
This guide shows you the key tool for making a secure retirement a reality: financial planning. It will help clarify your retirement goals as well as other financial goals you want to “buy” along the way. It will show you how to manage your money so you can afford today’s needs yet still fund tomorrow’s goals. It will help you make saving for retirement and other goals a habit. You’ll learn there is no such thing as starting to save too early or too late – only not starting at all! You’ll learn how to save your money to make it work for you, and how to protect it so it will be there when you need it for retirement. It explains how you can take the best advantage of retirement plans at work, and what to do if you’re on your own.
Yes, retirement is a big purchase. The biggest one you may ever make. Yet you can afford it – with determination, hard work, a sound savings habit, the right knowledge, and a well-designed financial plan.
Your Savings Fitness Dream
Getting Fit…Managing Your Financial Life
It starts with a dream, the dream of a secure retirement. Yet like many people you may wonder how you can achieve that dream when so many other financial issues have priority. Besides trying to pay for daily living expenses, you may need to buy a car, pay off debts, save for your children’s education, take a vacation, or buy a home. You may have aging parents to support. You may be going through a major event in your life such as starting a new job, getting married or divorced, raising children, or coping with a death in the family.
How do you manage all these financial challenges and at the same time try to “buy” a secure retirement? How do you turn your dreams into reality?
Start by writing down each of your goals in Worksheet 1 – Goals and Priorities. You may want to have family members come up with ideas. Don’t leave something out at this stage because you don’t think you can afford it. This is your “wish list.”
Organize them into goals you want to accomplish within the next 5 years or less, and goals that will take longer than 5 years. It’s important to separate them because, as you’ll see later, you save for short-term and long-term goals differently.
Next, organize your goals in order of priority.
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.
Write down on Worksheet 1 what you need to do to accomplish each goal: When do you want to accomplish it, what will it cost (we’ll tell you more about that later), what money have you set aside already, and what you are willing to do to reach the goal.
Look again at the order of priority. How hard are you willing to work and save to achieve a particular goal? Would you work extra hours, for example? How realistic is a goal when compared with other goals? Reorganize their priority if necessary. Put those goals that are unrealistic into your wish list.
Beginning Your Savings Fitness Plan
Now let’s look at your current financial resources. This is important because, as you will learn later, your financial resources affect not only your ability to reach your goals, but also your ability to protect those goals from potential financial crises. These are also the resources you will draw on to meet various life events. Worksheet 2 – Financial Documents Checklist can help you get organized.
Calculate your net worth. This isn’t as difficult as it might sound. Your net worth is simply the total value of what you own (assets) minus what you owe (liabilities). It’s a snapshot of your financial health. Use Worksheet 3 – Balance Sheet to Calculate Net Worth to write down your information and do the calculation.
First, add up the approximate value of all your assets. This includes your home (if you own one) and your checking and savings accounts. Include the current value of investments, such as stocks, real estate, certificates of deposit, retirement accounts, IRAs, and any other retirement benefits you have.
Now add up your liabilities: the remaining mortgage on your home, credit card debt, auto loans, student loans, income taxes due, taxes due on the profits of your investments, if you cashed them in, and any other outstanding bills.
Subtract your liabilities from your assets. Do you have more assets than liabilities? Or the other way around?
Your aim is to create a positive net worth, and you want it to grow each year. Your net worth is part of what you will draw on to pay for financial goals and your retirement. A strong net worth also will help you through financial crises.
Review your net worth annually. Recalculate your net worth once a year. It’s a way to monitor your financial health.
Identify other financial resources. You may have other financial resources that aren’t included in your net worth but that can help you through tough times. These include the death benefits of your life insurance policies, Social Security survivor’s benefits, health care coverage, disability insurance, liability insurance, and auto and home insurance. Although you may have to pay for some of these resources, they offer financial protection in case of illness, accidents, or other catastrophes.
Envision Your 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 in 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 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.