How many of you can recall driving in a car with children and hearing, “Are we there yet?”
Depending on their ages, it may seem like eons ago or as recently as last week.
There’s no question that going on any journey involves planning. It can be involved and detailed or quick and approximate, depending on the ultimate destination. Regardless, some level of planning is required to get from point A to point B.
Now, consider the above in relation to your financial goals. Eventually, you have to make decisions about how you’ll build up your savings for the future.
How will you approach this challenge, monitor your progress, and know when you have achieved your goal?
Debt and savings
We are a nation of debtors, spending more than we earn, and the national debt currently exceeds $18 trillion.1
Most people have some level of personal debt, with U.S. households collectively owing over $12 trillion. According to the New York Federal Reserve, “Household borrowing in the
U.S. climbed to its highest level since 2010 in the third quarter , driven by increases in mortgage lending, auto loans, student loans, and credit cards.”2
Managing debt requires making smart buying decisions. There are rules of thumb with debt-to-income ratios and you should be knowledgeable about these percentages to avoid potential problems.
Total debt includes everything you pay for (e.g., expenses, loans, taxes, insurance premiums—even alimony), and should be 35 percent or less of your gross (before taxes) monthly income. Housing costs should be no more than 30 percent of your gross monthly income, and consumer debt should be 20 percent or less of your net (after taxes) monthly income.3
In conjunction with these spending concerns, you should consider your savings and investing goals. According to the St. Louis Federal Reserve, as of January 2016, the average U.S. house- hold was saving only 5.5 percent of its income.4 Most financial advisors would agree that this rate is woefully inadequate and will likely translate to money shortages in retirement.
Allstate, in conjunction with FTI Consulting, reported results from a national survey of American adults conducted January 2016, as published in the Allstate Key Findings Report.5
- Fifteen percent of Americans polled say they find it tough to make ends meet every month.
- Only 37 percent of Americans report they live comfortably and can save some amount for retirement or other needs.
- Forty six percent say they can get by every month but find it difficult to save and invest (for retirement or other endeavors).
- Thirty two percent of respondents report that in the past year, withdrawals were made from savings or pension funds to make ends meet and reduced contributions were being made to a 401(k) or other retirement fund.
- Sixty four percent indicated their financial well-being is reliant on their own actions, while nearly 32 percent said it its dependent on events usually out of their control (e.g., economic changes, employer decisions, an unexpected morbidity, or stock market fluctuations).
- Fifty four percent report their current financial position as either fair or poor, while 45 percent say good or excellent. Forty-two percent indicated they expect their personal financial situation would improve, and 46 percent feel it will worsen.6
Only part of the puzzle
Many financial advisors estimate that you’ll need about 70 to 80 percent of your pre-retirement earnings to maintain a comparable standard of living when retired. In addition to Social Security benefits, you will likely need to access additional income from a pension, stock and bond investments, an annuity, or savings to fill in the financial gap. According to Social Security, “If you have average earnings, your Social Security retirement benefits will replace only about 40 percent. The percentage is lower for people in the upper income brackets and higher for people with low incomes.” 7
Additionally, “For 65 percent of elderly beneficiaries, Social Security provides the majority of their cash income. For 36 percent of them, it provides 90 percent or more of their income. For 24 percent of them, it is the sole source of retirement income. Among those aged 80 or older, Social Security provides the majority of income for 76 percent of beneficiaries and nearly all of the income for 47 percent of beneficiaries.” 8
Going it alone
You are in charge of setting aside funds for your retirement. Those who under- stand the challenges retirement can bring will be methodical and proactive in approaching their anticipated needs.
It is your responsibility to save for retirement whether you’re covered by an employer’s pension plan, participating in a company sponsored 401(k) (and maximizing the employer match, if available), self-funding a retirement plan, or saving in an IRA or Roth IRA.9 Saying you don’t have the time to invest in your future is indefensible.
After retirement, cash flow will come from invested savings, a systematic withdrawal plan, and living off interest and dividend income in addition to Social Security. Plus, even if you continue to work after retirement age, you can still collect Social Security.
You should thoroughly vet and understand your options prior to purchasing an annuity from an insurance company.10 For some, a reverse mortgage can be an important part of the solution.11
These sobering statistics are a loud and clear warning to seriously review your debt-to-income ratio, reassess your spending and saving practices, set financial goals, and consider additional opportunities to ensure adequate cash flow after retirement. Obviously, the earlier you start planning and taking action, the more you can accomplish.
Consulting with a certified financial planner is a smart action step that can get you on the right path.12 Time can be either your friend or your nemesis; it depends on when you begin your journey. Your final pre-retirement destination should change from “Are we there yet?” to “I have arrived!”
William (Bill) Wolfson, DC, FICC, MPAS(SM), CFP, is a financial consultant and adviser. He is a member of the Financial Planning Association of Long Island, the New York delegate to the American Chiropractic Association, and a member of the New York and Florida chiropractic associations. He retired after 27 years of chiropractic practice and can be contacted at 631-486-2792 or firstname.lastname@example.org.
1 Patton M. “National Debt Tops $18 Trillion: Guess How Much You Owe?” Forbes.
http://www.forbes.com/sites/mikepatton/2015/04/24/national-debt-tops-18-trillion-guess-how- much-you-owe/#419a87325ebd. Published Apr. 2015. Accessed Feb. 2016.
2 Pramuk J. “New York Fed: Household debt at highest level since 2010.” CNBC. http://www.cn bc.com/2015/11/19/new-york-fed-household- debt-at-highest-level-since-2010.html. Published Nov. 2015. Accessed Feb. 2016.
3 “Understanding Your Debt to Income Ratio.” Credit Karma. https://www.creditkarma.com/ article/debt-to-income-ratio. Published Dec. 2011. Accessed Feb. 2016.
4 “Personal Saving Rate.” Economic Research Federal Reserve Bank of St. Louis. https://research.stlouisfed.org/fred2/series/PSAV ERT. Updated Feb. 2016. Accessed Feb. 2016.
5 “Heartland Retrospective.” Heartland Monitor Poll No. 25 Web. http://heartlandmonitor.com/ heartland-retrospective/. Updated Mar. 2016. Accessed Mar. 2016.
6 “Allstate/National Journal Heartland Monitor XXV Key Findings.” FTI Consulting Strategic Communications. http://heartland monitor.com/wp-content/uploads/2016/01/FTI- Allstate-NJ-Heartland-Poll-XXV-Findings- Memo-Jan-11-at-4pm-ET.pdf Published Jan. 2016. Accessed Mar. 2016.
7 “Retirement Planner: Learn About Social Security Programs: Prepare For Your Financial Needs.” Social Security. https://www.ssa.gov/ planners/retire/r&m6.html. Updated Mar. 2016. Accessed Mar. 2016.
8 “Research, Statistics, & Policy Analysis: Income of the Population 55 or Older, 2012.” Social Security. http://www.ssa.gov/policy/docs/ statcomps/income_pop55/index.html. Published April 2014. Accessed Feb. 2016.
9 O’Brien S. “Do-it-yourself retirement planning for the self-employed.” CNBC. http://www.cn bc.com/2016/01/15/do-it-yourself-retirement- planning-for-the-self-employed.html. Published Jan. 2016. Accessed Feb. 2016.
10 Vernon S. “A new approach to do-it-yourself retirement planning.” CNBC. http://www.cbs news.com/news/a-new-approach-to-do-it- yourself-retirement-planning/. Published Jan. 2016. Accessed Feb. 2016.
11 Wolfson HW. “A Reverse Mortgage May Be Something to Consider.” Physician’s Money Digest. http://www.hcplive.com/physicians- money-digest/retirement/A-Reverse-Mortgage- May-Be-Something-to-Consider-. Published June 2015. Accessed Feb. 2016.
12 Wolfson HW. “Save for Your Retirement and Future…The Alternative is Unappealing.” Physician’s Money Digest. Published Feb. 2015. Accessed Feb. 2016. http://www.hcplive.com/ physicians-money-digest/retirement/Save-for- Your-Retirement-and-Future–The-Alternative- is-Unappealing.