The Retirement Corporation of America

Adventures In Life-Stage Financial Planning

Planning for the good life after retirement isn't a short-term activity, but a lifetime activity—beginning the day you get your first job and continuing to the very end stages of retirement itself. If you didn't start the day you got your first job, then start as soon as you can—today if possible. Remember: Better late than never—but better never late!

Your financial plan for retirement isn't something you create once, early in life, and forget about. It is something you create as soon as you start thinking about retirement. Then you keep updating it as your goals and dreams change. Review your retirement plan at least once a year. Prepare for a more thorough overhaul each time you move from one life stage to another.

Your goal is to keep your retirement plan fresh and up to date—personally crafted to what you want out of retirement and how quickly you are moving along the path to financial success.

Here are the major life stages most of us pass through—and the thinking and strategic planning you should be doing at each stage:

Stage #1—20-35: The Starting-Out Years

This is the first stage of your adult life. You have little or nothing saved and it is a virtual certainty that you have done no serious financial planning for your future. But your life as an adult is opening up. You'll get your first serious job during this stage. You will probably get married and maybe even have one or more children. By the time you move beyond this stage, you will have gained knowledge and experience about budgeting, saving, and investing your money. You will have started giving serious thoughts to what the future holds for you.

Take a course to help you learn the basics of financial planning, investing, asset protection and more. More specifically, here's how to make the most of your "starting-out" years:

•  Make your first financial plans for what you want out of the future—such as a better home, college for the kids, and a secure retirement. You and your spouse dream your dreams about the future—and start the planning that will make those dreams come true.

•  Start a college savings fund for your children. Fund it with growth assets—stocks and mutual funds—that will grow through the years before you will start withdrawing the money to pay college bills.

•  Start contributing to your 401(k) plan at work. Money may be tight at this point, but every $1 you contribute now can grow at market value (currently 8 percent), before you actually retire.

•  If you don't have a 401(k) plan, and if there is money available, fund a Roth IRA. The after-tax money you contribute will build up, tax-sheltered, over the years. There will be no tax liability due when you withdraw the money in 30 or 40 years, if you've met all qualifications.

•  Learn the basics of insurance, and make sure you have the protection you and your family need: life insurance, homeowner's, automobile, disability, and liability insurance.

•  Think about your career prospects—and what you can do now to increase your earning power in years to come. Take courses to broaden your skills. If you hope to launch a business of your own, this is the time to lay the ground-work.

Potential trouble spots: You're just learning the basics about managing money and it's easy to go off-track at this stage. So, here's what to watch out for:

•  Letting your spending get out of control. You started out with next-to-nothing and you must buy everything—car, house, furniture, furnishings and more. This is the stage when you must gain the discipline to spend less and save more.

•  Letting debts pile up. If you're not careful, you can pile up debts so fast at
this stage that you never regain your financial footing.

•  Falling behind on your financial planning. Either you don't work up the momentum to start, or you draw up a list of hopes and dreams, but never turn it into a functioning financial plan.

•  Settling for the job you now hold, instead of mobilizing your energies to push for a better-paying position.

Investing strategy: You have twin investing goals at this time: building up cash for the down payment on a house and for other short-term goals to medium-term goals; and investing for growth to pay for your long-term goals. A reasonable asset allocation for this stage would be:

•  75 percent equities—growth-oriented stocks or mutual funds.

•  25 percent cash—money market mutual fund, Treasury bills, and bank CDs, to be used to make the down payment on a home and to cover other short-term goals. For medium-term needs, keep money in short-term bond funds.

Stage #2—35-45: The Setting-Up Years

You are definitely off the ground, financially speaking. You probably own a home and one or more cars, and have learned a lot about managing money and making financial plans for the future. You probably have moved beyond your first job into something that pays better and offers more long-term potential. Here's what to do to make sure you are well set up, before the "setting-up" years end:

•  Refine your financial plan so it reflects the more mature goals and dreams you have at this stage of life.

•  Start researching college costs so you know how big your college fund must be.

•  Think through your housing situation. Do you want to stay where you are, or will you be buying something bigger in the future?

•  Contribute all you can to all tax-sheltered retirement savings plans. If you move to a new job, make sure you roll over funds in your 401(k) plan so the tax sheltering isn't lost.

•  Start doing some serious long-range thinking about retirement—starting with some calculations about how big a retirement fund you will need.

•  Keep your career moving forward. Add whatever skills are necessary to succeed at your present job. Build networks that can help you move on to a better job.

•  Sharpen your investing skills. The money in your retirement accounts will be building up fast from here on. You want to be certain you can manage that money with the best combination of risk and reward.

Potential trouble spots: Here's what to watch for at this stage:

•  These are heavy spending years, as the kids get older, and living expenses pile up. It's easy to let your controls over spending and debt slip—which can undermine all your financial plans.

•  Keep insurance current with your growing net worth. If you don't have enough life insurance, your premature death, at this stage, could leave your family nearly destitute.

•  You must have disability insurance—since, at this stage, you are six times as likely to be disabled and unable to work than to die.

•  Don't let the first signs of financial success go to your head. You are making a decent income and you have started to build up your retirement savings to
a reasonable level. It's easy to look at your accumulating wealth and start frittering away money on impulse items—from fancy vacations to a more costly sports utility vehicle than you can really afford.

Investing strategy: You still are investing primarily for growth at this stage, since you won't be tapping your retirement savings for another 20 to 30 years. You do want to be more cautious with your college savings fund. You had been investing it for growth. Now, you are getting closer to the time when you start drawing out that money. Start shifting your college fund from all-out growth to a combination of growth and income. A reasonable allocation at this stage would be:

•  75 percent equities—growth-oriented stocks and stock mutual funds.

•  15 percent bonds—short-term or medium-term government bonds to make sure you have cash to pay the first college bills when they appear.

•  10 percent cash—money market mutual fund, Treasury bills, bank CDs. Use this money to finance short-term goals—including the down payment on a better house, a summer house, or a boat.

Stage #3—45-55: The Spending Years

Income should be up at this stage, because you are moving into your peak years at work. But spending is also up, because you almost certainly will be paying college bills at this stage. Saving money will be hard—but you must do so, if you are to be able to live the good life in retirement. Here are things to consider at this stage:

•  Keep your financial plan up to date.

•  Start to do some serious thinking about retirement. Where will you live? Will you want to work after you retire?

•  Contribute as much as you possibly can to your 401(k) plan, and to other retirement plans. It will take lots of will power and discipline, but you must do it.

•  Take a realistic approach to paying for college for the kids. Pay what you can—but not so much that it eats up all your savings. You and your kids can borrow for college—and the kids will have many years in which to repay their education loans. Nobody will make you a loan to retire on. You want to be a good parent—but you don't want to live in poverty tomorrow because you paid all the college bills today.

•  Make sure your insurance is up to date—enough life and disability insurance to protect your family if something happens to you.

•  Begin to investigate long-term care insurance—which pays the bills if you or your spouse wind up in a nursing home. The younger you are when you buy long-term care insurance, the lower the premium. So it definitely pays to shop long before you are likely to need the protection.

•  Rethink your career. It's easy to just drift along in your present job, because it is comfortable and familiar. If you are going to change jobs, this is the last stage in which you should do it.

Potential trouble spots: Here is what to beware of at this stage:

•  Letting spending on college eat up your retirement nest egg—and cutting back on new contributions to retirement savings plans.

•  Going deeply into debt, as you try to maintain your lifestyle in the face of heavy college bills.

•  Increasing the risk level of your investments. Partly that comes because money is flowing out so fast to pay college bills, but also because you have been investing for years, and aren't as cautious as you used to be.
•  Going to "sleep" at work, so that you stop getting raises and promotions and your chances of moving to another job dwindle to nothing.

•  Not making serious plans for retirement because you feel you haven't saved or invested enough to give you the retirement you want.

•  Not having drafted a will, or prepared such papers as a durable power of attorney, because you are getting to an age when you just can't bring yourself to think about death.

Investing strategy: The emphasis still is heavily on growth. Cash mostly is money that will go to pay college bills. A reasonable allocation at this point would be:

•  65 percent equities—growth-oriented stocks and mutual funds.

•  20 percent bonds—partly to pay farther-out college bills, but also as a conservative offset to your growth-oriented equity investing. Emphasis is on government bonds or bond funds.

•  15 percent cash—money market mutual funds, Treasury bills, and bank CDs. This is mostly money that will go to pay near-term college bills.

Stage #4—55-65: The Accumulation Years

This is when your retirement planning should kick into high gear. These should be the years of peak income. College bills are wholly, or mostly, past—meaning there is more money to be saved and invested. Years of compounded, tax-sheltered growth in retirement savings accounts are paying off, as sums in those accounts reach very impressive levels. Here's what to consider in this stage:

•  Accelerate your saving and investing for retirement. You want to contribute the maximum at this stage to every retirement savings plan you can contribute to.

•  If you are "maxing out" your retirement savings plans, then invest in an annuity to increase the amount of your retirement savings that can be sheltered from taxes.

•  Work on your post-retirement budget, so you'll have a pretty good idea of what it will cost you to live in retirement.

•  Nail down plans for post-retirement work. Investigate the job situation with your current employer, or with other employers who can use your talents. Take whatever courses or additional training you need to remain competitive in the marketplace.

•  Nail down where you will live in retirement. If you're planning to move elsewhere, visit the locale on vacation a few times, to make sure it's where you want to be.

•  If you haven't bought long-term care insurance, consider buying it now—for protection if you must enter a nursing home.

•  Make sure you know what senior discounts are available from your insurance companies. Some senior benefits start as early as age 50.

•  Make sure you know how to begin collecting benefits from Social Security.

•  Investigate the different channels by which your employer will let you take your pension benefits when you retire.

•  Make sure you know how to continue benefits from your company's employee benefits plan into retirement.

•  Wrap up whatever details need completion in your estate plan.

Potential trouble spots: Here are the most common mistakes people make
•  Jumping the gun on retirement spending. The accumulation of assets in retirement savings accounts looks so tempting, that's it's easy at this stage to lose control and start spending your nest egg prematurely.

•  Not doing your late-stage retirement planning early enough to make for wise decision-making. Investigate communities where you might want to live in retirement at this stage--rather than buying and moving without much investigation after you've retired.

•  Taking early retirement without investigating how much you lose in pension and other benefits by not staying until the normal retirement age.

•  Taking Social Security benefits, starting at age 62, without calculating how much more you'd get if you delayed the benefits for a few years.

•  Getting so jittery about your retirement nest egg that you turn into a nervous-Nelly investor. You probably won't reduce your risk by much, but you're nearly certain to cut into your return.

•  Getting panicky because you fear your retirement nest egg isn't big enough, so you start taking very big risks in search of a higher return.

Investing strategy: Retirement may be approaching. In fact, you may actually be retired by the time you hit your normal retirement age. Still, as this lesson keeps stressing, your retirement nest egg must last you for many years past your retirement age. You don't want to take huge risks with your money in this stage, but you still want to emphasize growth. A reasonable allocation at this stage might be:

•  60 percent equities--divided pretty equally between growth-oriented stocks and funds and income-oriented stocks and funds.

•  40 percent bonds--with the emphasis on government bonds or bond funds.

Stage #5--65-75: The Transition Years

By this stage, you most likely are retired. You enter the transition years living on income from a post-retirement job and/or from your company pension and Social Security. As you move through the transition years, you come to rely less on that post-retirement job, and more on the money you have started taking out of your retirement savings plans. These are good years for most people. Health is generally good and many people do the traveling they never had time to do during the earlier stages. Here are things to consider at this stage:

•  Make the most of a post-retirement job. The longer you can keep it going, the more you'll supplement your retirement funds with earned income.

•  Enjoy what you didn't have time to enjoy earlier in life--travel, winters in a warm locale, golf, fishing, and education. The more physically active and mentally alert you are at this stage, the more active and alert you'll stay into the late stages of retirement.

•  Monitor your spending, and fine-tune your retirement budget if you find you are drawing down your retirement savings too fast.

•  Get all the senior discounts you are entitled to--from airlines and hotels, utilities, movie theaters, and the local transit service.

•  If you have any doubts about your ability to manage income and savings in retirement, pay for time with a financial planner. Managing your money is different after you retire. You want to get off on the right foot from the very beginning.

•  Even if you stay in your own town, look into what you could gain by selling your home and moving someplace smaller.
•  Make sure your will is always up to date, and that the executor you have chosen to manage your estate is well enough, physically and mentally, to do the job.

Potential trouble spots: Here's what to watch out for at this stage:

•  You see retirement as a time for cutting loose, so you start spending your nest egg far faster than you should. Before you know it, you have drawn down your retirement savings far below where they should be at this stage.

•  Because you are allowed a lump sum distribution from a 401(k) or company pension plan, you take the money and run—instead of rolling it over into an IRA to keep it tax sheltered. Resist the temptation to use that lump-sum distribution as found money—to be blown on a cruise, or a fancy SUV.

•  You become a hyper-cautious investor—forgetting that the money in your retirement savings accounts must be able to hold up against inflation for 20 or 30 years more.

•  You'd like to have a bigger nest egg than you do, so you take big chances with your investments in hopes of earning more.

•  You forget how critical it is to remain physically and mentally fit in retirement, so you let your guard down—and develop physical ailments, or fall into a serious depression.

•  You keep paying big money for a life insurance policy you really don't need.

Investing strategy: You do want to invest more for income than you did at earlier stages, but your money must last a long time, so you continue to invest for growth. A reasonable asset allocation at this stage might be:

•  50 percent equities—You would want a mix of growth-oriented and income-oriented stocks and mutual funds. You could stick with growth and income, equity-income and balanced mutual funds.

•  40 percent bonds—You would want a mix of short-term and longer-term bonds or bond mutual funds. Since you want to minimize risks, limit your investing to U.S. government bonds—since they are the safest investments around.

•  10 percent cash—This is rainy day money, in case there is a medical emergency or you must make a repair on your house. Invest the money in a money market mutual fund or in Treasury bills—so it is available to you any time you need it.

Stage #6—75 and Beyond: The Senior Years

You have been retired for some years, but the need for retirement planning hasn't ended. If you have made it to age 75, the odds are you will live for many more years. Here's what to do to make sure you make it to the end of your senior years without running out of money:

•  Keep check on how fast you are using up your retirement nest egg. You probably can't expect much income from a job anymore. And you don't want to increase your risk exposure to earn a higher return. You must control spending to make sure you don't outlive your money.

•  Keep as occupied as you can with hobbies and pastimes. Maintaining good health is critical at this stage. All the research indicates that people who keep busy enjoy better physical and mental health than those who allow themselves to vegetate.

•  Make sure your estate and all essential papers—such as will, power of attorney, etc.—are in order.

•  You probably don't have any over-riding need for a big life insurance policy at this stage. You only want enough to cover any shortfall for your spouse if you die, and the payout on pensions and annuities is cut back to the survivor level.

•  Think through how you want to dispose of assets. Even if Congress repeals the estate tax, you still have bequests and trusts to think about. Make sure your assets go where you want them to go.

•  If you need more wealth, consider selling your home if you haven't already. It may have sentimental value to you, but children seldom want to move back to the family home when the parents have died. Also, the family home may be just too much for you to care for. Unless you are careful, your diminished ability to keep up the home could lead to a loss in property value—or even to outright safety hazards.

Potential trouble spots: Here is where things can go wrong in this stage:

•  Letting things slide. You almost certainly don't have the energy you once did. Important papers get put off to one side. Your once-tight controls over spending begin to slip and gradually your retirement budget begins to unravel.

•  Losing sight of your investments. You may be a long-term investor, but that doesn't mean you can lose sight of your investments, no matter what your age. You want to monitor performance of individual investments and their peers. You need to make sure you are taking the right approach to risk and reward, given your age and financial well-being.

•  Not keeping up to date on your finances. You need less life and disability insurance, but you need enough homeowner's insurance to protect your property. You need to keep your checkbook balanced and all bills paid on time.

Investing strategy: Your primary aim is income at this stage. But you must assume you will live many more years, so you can't stop investing for growth. A reasonable allocation for this stage would be:

•  40 percent equities—You would want a mix of growth-oriented and income-oriented stocks and mutual funds. You could stick with growth- and-income, equity-income, and balanced mutual funds.

•  50 percent bonds—You would want a mix of short-term and longer-term bonds or bond mutual funds. Since you want to minimize risks, limit your investing to U.S. government bonds—since they are the safest investments around.

•  10 percent cash—This is rainy-day money, in case there is a medical emergency or you must make a repair on your house. Invest the money in a money market mutual fund or in Treasury bills—so it is available to you anytime you need it.