Taking the Mystery Out of Retirement Planning Part 11
Tracking Down Today’s Money
This topic will help you shine a light on the mystery of where you will find the money to support yourself in retirement. Many people don’t have a clear idea of how much money they actually have, so it’s hard to know how much they might be able to count on when they no longer work. Finding out what part of today’s money can go toward retirement simply means adding up the value of all your current assets. In this case, “assets” are cash, investments, and anything of value you can exchange for cash, like your house, savings bonds, or even fine jewelry. This figure will be your first important clue.
Recording these amounts could be a pleasant surprise. You don’t want to count emergency money and savings for your children’s education or a big trip – only money that you are not going to touch for at least 10 to 15 years. For purposes of the Pre-Retirement Assets/Savings Worksheet, you also don’t want to include any future Social Security benefits and guaranteed pensions because these items are future income, not current assets and they will be included later. Money in work-related retirement plans, like 401(k) plans, is counted, however, and you will want to include amounts from current and former jobs. In fact, these will probably be at the top of your list of today’s assets that follows.
More Than You Think
Tracking your money in retirement plans should be fairly easy. If you didn’t roll over your retirement plan balance when you changed jobs into a new retirement plan account or into an IRA, or if you didn’t take your account balance as cash, you may discover some forgotten retirement assets you have. This is a good time to think about keeping your money with fewer, rather than more, quality financial institutions so it is easier to manage.
Recording current and old retirement account amounts on the Pre-Retirement Savings/Assets Worksheet is important for a couple of reasons. First, locating an old account could take time. The longer it’s “lost,” the harder it will be to find. Second, understanding your current financial standing should automatically start you thinking about how to make your money grow.
Quit Worrying, Start Planning
Remember you’re facing a retirement that’s probably going to be longer than your parents’ and will involve more uncertainties. This new kind of retirement probably means there are many American workers worrying about, instead of planning for, the future.
You can choose to stop worrying and start figuring. Not only will you come up with facts to work with, the chances are good you might change the way you save. The 2011 EBRI survey also found that 44 percent of people who tried to figure out their financial futures ended up changing their retirement savings plans.
If you are a married woman: In preparing for retirement, women face the very real possibility of spending part of their retirement years without the support of a husband – most likely through widowhood. The loss of a spouse can sometimes mean the loss or reduction of benefits that can place women in financial jeopardy. For that reason, women will need to focus on their financial resources as a single person as well as half of a couple.
For purposes of the following worksheets, consider filling them out as a couple and as a single person. Consider what happens to your Social Security and to retirement benefits if your spouse dies or you divorce. Know what assets you can count on. Check Social Security benefit documents, retirement plan documents, and wills. Remember that wills are important, but they may not provide the protection desired. Depending on the way assets are titled or the terms of a will, the money women believe they can count on may not be passed to the surviving spouse.
Next, you can estimate how much that money could be worth because it will probably grow – in the 10 to 15 years between now and retirement. The Pre-Retirement Assets/Savings Worksheet will help you project a 10 to 15-year total, which will help you estimate a 30-year total. Yes, it’s just a guesstimate, because the further in the future you plan, the more that can happen. But the totals give you some idea of how much you may have for your retirement years. People who are retired may want to skip this worksheet and focus on the information about ways to grow your money.
In addition, this worksheet will let you see how much your money can grow by investing it in different ways. In fact, you will be able to assign different rates of return to different types of savings and to see how your decisions can impact the growth of your money over the next 10 to 15 years. Rates of return are simply the amount your money earns over a certain period.
How your money increases over time will depend on the nature of your investments, the rates of return, and other factors, such as the economy. One kind of investment, for instance, is a bond, which is often referred to as a “fixed income” investment because the interest rate is fixed. As an example, if you owned a bond with an original value of $10,000 and you got a 5 percent return (or yield) on your investment, your original investment would increase to $16,289 in 10 years.
You will probably want to dig deeper by assigning different rates of return to different pots of money-workplace savings accounts, IRAs, bank savings accounts-you have put aside for retirement. Let’s say you have $2,000 in a checking account that you never use. Your rate of return, in this case, with interest compounded monthly, will be low, maybe 1 percent. But your money is safe. Then let’s say you’ve invested in a stock mutual fund for 15 years using your retirement plan account and you get a return of 9 percent. Investments in securities can bring a higher rate of return than simple interest because prices of securities often rise and gains are compounded. Of course, security prices can fall, as we saw with stocks in 2000, 2001, and 2008. The tradeoff for aiming for higher returns is taking on more risk, including the risk of losing money. Keep this in mind in selecting rates of return for the Pre-Retirement Savings/Assets Worksheet.
In the example above, with some money invested in stocks and some in a safer, interest-bearing account, you are already doing what the experts recommend. You are practicing “asset allocation” – by putting your money in different types of products that earn different rates of return. Financial planners highly recommend this technique as a way to spread risk. A general allocation is to have some money in “cash,” such as a savings, checking, or money market account with little or no risk; some money in bonds, with a little more risk but paying more interest; and some money in stocks, with more risk but a likely higher return, especially in the long run.
Another way to spread your investments among different categories is to invest in index mutual funds. Index funds are a collection of investments, such as bonds or stocks that closely match the performance of the major holdings for that category of investment. For instance, a Standard and Poor’s (S&P) index fund tracks the 500 broad-based stocks that comprise the S&P 500 Index. A bond index fund would track the performance of major bond holdings in that index. In this way, your investment is following the financial market for that particular category.
Experts recommend that you spread your money among a range of investments so that your money is “diversified.” In addition, most experts add that you should not only invest among categories but within each major category as well. For instance, your risk of losing money is less if you buy shares in several mutual funds investing in various types of assets (such as large company stocks, small company stocks and bonds). Even investing in just one mutual fund will help you to diversify compared to investing in individual securities on your own, since mutual funds, by their nature, allow you to invest in a collection of stocks, bonds, etc.
Financial planners believe that diversifying your investments helps reduce risk as markets move up and down. For example, in 1980 when some certificates of deposit (CDs) were paying 12 percent, stocks were barely holding their own; but in 1999 most stock prices were rising fast, and CDs were paying 5 percent.
Too much money in one type of investment is always a bad idea and puts your money at risk. For example, many American workers are holding a lot of their employers’ stock in their retirement accounts. This ties both your current paycheck and your retirement savings to one employer’s success…or failure. This can be risky.
Now that you have tracked down your retirement savings, personal savings, and other assets and investments, you can return to the worksheets, and select the tab to fill out the Pre-Retirement Savings/Assets Worksheet. You can read the first part of this series by clicking on this link http://www.workplace-weekly.com/2012/08/taking-the-mystery-out-of-retirement-planning-part-1/
Next week’s topic is Tracking Down Future Money…At Retirement And After
Courtesy: U.S. Department of Labor Employee Benefits Security Administration