The COVID-19 pandemic has shaken us all, undoubtedly leaving us with more questions than answers.
What is happening in our world right now? What is happening in our country? How will the stock market respond? Should I own more bonds? How stable is my employment? Should we downsize? Should we be more cautious with our money?
For many, the answer was pausing retirement contributions to build up cash reserves to protect against the unexpected. Not a terrible idea, but this may not be the right approach for everyone.
The right financial plan should always have you ready for the unexpected. Good financial planners expect the unexpected and build plans tailored to meet your objectives regardless of economic or global pressures.
Suppose you don’t already have a financial plan. In that case, you can use the uncertainty of our world today as the catalyst for creating one and increasing your financial independence in the process.
As a retirement planner in Newark, California, here’s how I would approach retirement planning in 2022.
Start with the Objective
All good financial plans start with the end in mind. If you don’t know where you’re trying to go, how will you know when you get there?
Think about your dream retirement: What does it look like? Do you want to move? Travel more? Fund a grandchild’s college dreams? Retire as early as possible? What kind of legacy do you want to leave for your heirs?
The answers to these questions will differ from person to person, and they only scratch the surface of discovering your dream retirement. Only you know what’s important to you – take the time to determine what those things are.
Once your goals are established, you can reasonably attach an amount of money you will need to draw from every year to fulfill that dream retirement. That annual figure will help determine the total amount of investments you need to have saved for retirement.
As a generic, ballpark figure, you can divide your annual income needs by 3.5% to find your total net worth needs upon retirement. For example, a couple needing $50,000 can assume they’ll want to have about $1.4 million saved.
The Ladder of Personal Finance
Now that you know your goals for the long term, it’s time to get practical.
Here’s a progressive list of 5 steps you can take to start nailing your personal finance. Each step builds on the previous, so move to the second to help fulfill your dream of retirement.
- Prioritize Your Emergency Fund – We’ve all heard the statistic, “40 out of 100 American adults couldn’t afford a $400 unexpected expense.” Don’t be part of the statistic – build up an emergency fund with at least 3-6 months of living expenses to shield yourself from disaster. You’ll be amazed at how much anxiety this buffer will relieve.
- Take Full Advantage of Your Employer’s 401(k) Matching – Many employers offer 401(k) “matching” policies, meaning every dollar you contribute will be matched up to a certain amount (usually 3-6% of your salary). This is the closest thing to free money.
- Pay Off Consumer Debt – Credit cards (and other forms of high-interest debt) have a crippling effect on your financial health. Make a plan to aggressively pay down these balances before you waste any more on interest.
- Contribute Extra to IRAs, HSAs, and 401(k)s – As a general rule of thumb, whenever the IRS places contribution limits (a maximum amount you can deposit) on an account you want to be contributing to said account. From a tax perspective, there’s no better deal.
- Save for Expected Expenses – Weddings, houses, cars, vacations – you usually have a general idea of when these significant expenses will come around. Start setting aside cash into “buckets” for each of these upcoming payments.
**These five points are not a doctrine, and they aren’t exhaustive. It is intended to be a starting point for many people.**
Strategies for 2022 and Beyond
Let’s touch on a couple of concepts you can utilize to protect yourself in times of uncertainty.
Wants, Needs, and Wishes
What worries us in times of uncertainty is income or lack thereof. Do I have enough right now? Will I have enough for the future? These are scary thoughts and regularly rank as the most stressful for those in and near retirement.
It may be beneficial to look at your monthly spending (and/or your anticipated monthly spending in retirement) and determine your wants, needs, and wishes.
No, it’s not enjoyable to cross off all the fun things you were planning on spending money on, but it beats the idea of running out of cash.
Without boring you with the details, a common strategy for retirees (and those nearing retirement) is to have separate investment buckets.
Consider bucket 1, which contains 2-5 years’ worth of expenses in conservative assets with systematic distributions. This bucket prevents you from ever selling equities or other securities in inopportune times and provides a reduction in volatility that can smooth your returns over time.
Then, in bucket 2, you have your long-term growth assets. Knowing that you likely won’t have to touch this money for ten years or more, you’re never concerned with what will happen tomorrow, this year, or next year. It’s easier to stay invested because you expect the inevitable ups and downs of the market.
Peace of Mind
When it boils down to it, we lack confidence in times of uncertainty. The two are antonyms.
The strategies I described above are tools to assist in tilting the seesaw away from uncertainty and back in favor of confidence. However, those are just two components of numerous tools available that will help to ease some of your money worries.
Consider Hiring a Retirement Planner
If the last few years have raised your levels of anxiety and stress to what feels like a new, permanent baseline, you’re not alone. Even those who kept their jobs and have seen their assets increase in value may have shaken their confidence. Having experienced what we have, we may all be asking ourselves, “what’s around the next corner?”
This may be one of the most important things about professional retirement planners. Over the years, they may have seen many different scenarios and market events that can help them understand your circumstances in the future. They can help you develop your retirement goals, then back into strategies for help getting you on track to your confident retirement.
It’s not just about building investment portfolios, increasing tax efficiency, behavioral counseling, asset location, minimizing drift and drag, or any of the other technical work we do on your behalf. It’s about all of that, plus an emotional connection with someone committed to serving your best interests. It’s having someone you trust to care for you and the assets you’ve spent a lifetime accumulating.
Above all, you will receive a holistic financial plan that helps remove some of the nature of chance, giving you confidence in your retirement journey.