The concepts and personal definitions of retirement are changing. For those who take the time to really consider and prepare, it means being in a position to choose how, where and with whom you want to enjoy your retirement. For many, work provides social and emotional well-being as much as financial support, and these individuals are able to choose whether they will downshift their careers to work less or in less demanding roles, or quit working altogether.
However, for too many of us, thinking about retirement is put off until too late. As a result, those individuals will not have the luxury of choice. They may need to work well into what is typically considered the retirement years because they cannot afford to retire. That is, if their physical and mental health allows them to work.
Helping Manage the Way America Retires
We can help change the way you retire by helping change the way you think about retirement. Retirement is often thought of as a destination, an endpoint. We believe it is a journey that starts with earning a first paycheck, targeting a desired retirement outcome and prioritizing financial goals accordingly. There is a saying that “life happens” — and it is no different when thinking about your retirement. Life’s events, both planned and unforeseen, can distract you from staying on track for your targeted retirement outcome. But by developing healthy financial habits early in life, and with some discipline, you can enjoy today while also preparing for the future.
There are four fundamental inter- connected financial behaviors that impact your ability to stay on track and achieve your targeted retirement outcome: Earning, Spending, Investing and Insuring (ESII).TM As life events shift and alter your course, you must continually reprioritize and balance these behaviors while maintaining a focus on your retirement target.
Understanding these financial behaviors and how they intersect is critically important to securing a desired retirement outcome. We believe working within this framework provides a structured way to develop those healthy financial habits and discipline that can help lead to a successful retirement. In this paper, we discuss the Earning behavior.
There are two phases of earning: income earned from wages in your working years and income typically derived from Social Security, pensions, savings, retirement accounts and other investments during retirement. Other sources of income during retirement may include continued wages for those healthy enough to work, and possibly home equity.
Earning in the Working Years
There are many factors affecting earning during your working years that are beyond your control: economic cycles, dying industries, bankrupt companies, layoffs, rate of pay increases, bonuses and incentives, injuries, health declines and more.
But you can control some factors such as your career path, education, skill development, industry choice, risk- taking, persistence and adaptability.
What is most controllable is the ability to protect you and your family’s earning ability and future income. Financial advisors can help you understand the effect of long-term earnings on your targeted retirement outcome and provide recommendations to protect wage-based income, such as health insurance, accidental death insurance, long- and short-term disability and long-term care insurance.
Earning for Retirement
Developing healthy personal financial habits in the working years may allow for future earnings in the retirement years.
Target the retirement outcome you imagine and desire, and set a course to help achieve that goal. Then recalibrate as your expectations evolve.
Save to develop a cash cushion equivalent to 6–12 months of expenses.
Invest earnings in your employer’s retirement plans, ideally up to the maximum annual contribution limit, but at least enough to maximize your employer’s match.
Invest additional earnings in Traditional and Roth IRAs to maximize their favorable tax benefits.
Protect earnings and investments from life’s unexpected setbacks with appropriate employer-provided insurance and other solutions.
The potential sources of income during retirement are wide and varied. And as you plan and save for retirement, you need to take stock of the potential income sources that will be available to you, and then develop plans to fund them out of current earnings.
The commonly considered potential sources are:
- Social Security
- Defined Benefit Pensions
- 401(k) and Other Defined Contribution Plans
- Traditional and Roth IRAs
- Cash Value of Life Insurance
- Longevity Insurance
- Home Equity
Earning Income in the Retirement Years
Income in the retirement years may come from a combination of the sources listed above. A retirement income plan should seek to coordinate and optimize those various sources. The plan’s investment strategy should be aligned with your retirement goals, be they in-retirement income-generation, capital preservation or legacy wealth transfer. The plan should try to optimize the sequence and coordination of spending from pre- and post-tax retirement savings vehicles and other savings and investment accounts to minimize taxes and maximize Social Security income.
Financial planners and advisors can be resourceful helping you convert today’s earning dollars into tomorrow’s satisfactory retirement income. According to a recent report by the Insured Retirement Institute, Baby Boomers who work with advisors are better prepared for retirement: More than 90% of them have retirement savings. Eight out of 10 Baby Boomers feel they are better prepared for retirement because they work with a financial professional.†
As people of all ages prepare for their retirement, we believe individuals are better served by working with a financial professional to tailor a retirement income plan to their unique situations. A professional can inventory potential income sources, project what the income potential may be from these sources and develop a strategy to prepare for retirement, as well as plan when and how much income to take from each of those sources in retirement.