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The 7 areas to focus on to prepare for retirement

August 05, 2018

Every week, Simply Money’s Nathan Bachrach, Ed Finke and Amy Wagner are answering your financial questions in The Cincinnati Enquirer. If you, a friend, or someone in your family has a money issue or problem, please feel free to send those questions to yourmoney@enquirer.com

 

Carol from Florence: What do you believe are the most important financial things to consider when planning for retirement? 

Answer: This is the $64,000 question, isn’t it? And we’re glad you’re asking it because most people aren’t. In fact, according to a 2018 study by the TransAmerica Center, only 22 percent of U.S. workers have a retirement plan that’s actually written down. 

Luckily, we’ve spent more than 20 years working with clients, giving us the ability to pare down the sometimes-chaotic process of retirement planning to seven major ‘decision points’ we believe every working person should embrace and implement:

  • Retirement income needs (determining what income will need to be replaced when you stop working)
  • Expense and debt management (analyzing how to reduce debt loads prior to retirement)
  • Tax planning (strategically planning the timing of retirement withdrawals and the amounts)
  • Investment management (maximizing the returns on your investments to create sufficient income to preserve your principal)
  • Risk management (controlling or minimizing the impact of unforeseen events on your money)
  • Estate and legacy planning (figuring out what will happen to your money and possessions when you’re gone)
  • Distribution and income sources (analyzing the best sources from which to derive your income, and in what sequence) 

The Simply Money Point is that preparing for retirement is something most people think about, but many hesitate to begin. In our experience, the people who live well throughout their retirement usually do so because they took the initiative and worked with a trusted financial advisor to create a personalized plan that addresses these seven main areas.

 

Thomas in Cleves: My daughter will be starting her freshman year at UC soon. Is there any sort of money advice you can give her since she’ll be living on her own for the first time? 

Answer: What an exciting time for your daughter! Here are our three biggest pieces of advice: 

If she’ll be working during the school year, this is a great budgeting rule: 50/30/20. Fifty percent of her take-home pay should go to “needs,” 30 percent to “wants,” and 20 percent should be saved. This is a great rule for adults to use, too! 

Moreover, a Roth IRA is her best friend because she’ll get tax-free growth! While Roth IRAs don’t offer an up-front tax break, that’s ok since she’s probably in a pretty favorable tax bracket right now. Plus, let us repeat: tax-free growth! 

She can save up to $5,500 this year in a Roth IRA, or up to however much she earned (whichever is less). Roth IRA contributions can be taken out anytime, tax-free and penalty-free. Then, when she turns 59 ½, she’ll be able to withdraw earnings tax-free and penalty-free since she will have held the account for more than five years. A Roth IRA is great to keep using when she gets a job in the ‘real world,’ too. 

Just consider this: let’s assume your daughter retires at age 65. If she contributes $5,500 just one time this year, never contributes another dime, and earns an average annual return of seven percent after fees, in 47 years that money will have grown to more than $130,000! And remember, that would be tax-free since it’s in a Roth IRA. Not bad for a one-time contribution! Just imagine if she keeps the momentum going. 

Another piece of advice? A credit card isn’t inherently evil, but it does need to be used responsibly. If she pays off a card in-full every month it can be a great financial tool to build her credit score – and the better her credit score, the better interest rates she’ll get on future car loans and mortgages. 

Her goal (truthfully, everyone’s goal) should be to be a credit card company’s worst customer. This means being someone who that company doesn’t make money off of every month in the form of interest payments and/or late fees. 

Here’s The Simply Money Point: The sooner your daughter can start practicing sound financial habits, the better off she’ll be throughout the rest of her life.

 

Responses are for informational purposes only and individuals should consider whether any general recommendation in these responses are suitable for their particular circumstances based on investment objectives, financial situation and needs. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing, including a tax advisor and/or attorney. Nathan Bachrach and Ed Finke and their team offer financial planning services through Simply Money Advisors, a SEC Registered Investment Advisor. Call (513) 469-7500 or email simplymoney@simplymoneyadvisors.com.

 

 

Retirement Financial Planning