Regardless of your planning method or process, it would be a mistake to succumb to standard formulas or a generalized approach to retirement planning. Right now, your retirement vision is based on your specific needs, wants, attitudes and beliefs, and it will undoubtedly change as your outlook and priorities change, but you should always base your income needs on realistic assumptions. Years before your planned retirement, it is a good idea to follow the steps outlined below to help you maximize your lifetime income.
Track your expenses now. You should begin to track your living expenses and gradually adjusting your budget to smooth out your consumption between your living requirements now and your requirements in retirement.
Start living like a retiree now. Taking it a step further, you could take the approach of changing your lifestyle now to reflect how you expect to live in retirement. That might mean downsizing your home now, reducing your leisure travel, driving more efficient cars, and generally adopting a more frugal mindset.
Increase your savings. Any combination of the first two steps should generate steady increase in excess cash flow which should be saved for retirement. Pre-retirees within 15 years of retirement should target a minimum of 20 percent of their earnings for contributing to their retirement.
Start exploring your Social Security options. Retirees who are able to postpone their Social Security benefits until age 70 can significantly boost their lifetime income; and additional Social Security planning for spousal benefits could increase it further.
Don’t invest too conservatively. Although the natural inclination is to reduce your exposure to risk-based investments like equities the closer you are to retirement, reducing your exposure by too much, too soon could stunt the growth of your capital. To ensure lifetime income sufficiency, today’s retirees should always have some exposure to equities. A broadly diversified, well-balanced portfolio of equities, bonds and cash offers the best opportunity to maintain the necessary growth of capital needed while minimizing volatility over the long-term.