Secret #45 Keep Learning About Finances
A recent survey suggests that financial literacy is lower than even most people might expect. Fidelity asked more than 2000 people — half who were between the ages of 55 and 65 and not retired — questions in eight different retirement categories. The average that people got right was a mere 30 percent. Absolutely nobody got all the questions correct and the highest overall grade was 79 percent. Can you do better?
One way to improve your financial literacy is to create a detailed retirement plan and run many different scenarios. While few retirement calculators are comprehensive enough to really help you learn, the New Retirement retirement planning calculator is.
This easy to use system is completely comprehensive. Here are more than 15 different things to try with your plans. Here are a few and visit the link for the rest.
- Run Scenarios on Your Longevity
There is a big difference between how much you need to retire securely if you live until age 75 vs. living until age 95 or longer.
However, most comprehensive retirement calculators use average life expectancy and don’t let you deviate from that at all even though the average life expectancy is essentially meaningless to most of us. Half of us will live longer than average and half of us will not live that long.
When planning your retirement, you should probably use your best case longevity age — the longest you think you might live. You could also try a longevity calculator to get a more personalized estimate.
- Run Scenarios on Inheritance Goals
Most retirees hope to leave something behind for heirs. A good retirement calculator will help you see what might be a reasonable expectation and let you set goals for an inheritance.
- Try Different Options for Your Social Security Start Age
Most people don’t realize just how valuable waiting to start Social Security is to their retirement security.
If you have not already started your benefits, you should definitely look up how much you will get at different ages and plug those numbers into a comprehensive retirement planner. Most people are really surprised by how much the delay can positively impact your financial wellbeing throughout retirement.
And, if you are married, try different starting ages for both yourself and your spouse. Additionally, you will want to look at what happens to your plan if the higher earner defers the start of benefits as long as possible up until the maximum retirement age of 70. Don’t focus on who is older. Or, who retires first. The key is to make sure the highest earner grabs the highest possible payout. This is probably the single smartest retirement decision married couples can make.
- Run Scenarios on Retirement Age and Work Income
Most retirement calculators ask you to enter your “retirement date.”
However, retirement age just doesn’t mean that much anymore. The reality for most of us is that we either transition toward retirement by going part time or we retire and then get some kind of retirement job. Others take a break from work and then resume in some capacity a year or two later.
Instead of entering a retirement date, look for a retirement calculator that allows you to set different levels of work income for different periods of your life and play with those variables.
If not yet retired, you should also see what happens if you were to unexpectedly lose your job or not be able to work due to a health issue — both of which are fairly common scenarios.
- Experiment with Investment Returns and Annuity Purchases
Investment returns is something many retirees are pretty worried about. Why not use a retirement calculator that lets you set returns for each account that you actually have? You should probably also play with different configurations.
What would happen to your overall plan if you were to:
Construct a bucket approach with one account invested aggressively for long term growth, another more conservatively and a third very conservatively.
Purchase a lifetime annuity to cover the difference between your guaranteed retirement income and your expenses.
Earn high rates of returns or low. (The New Retirement tool enables you to set optimistic and pessimistic rates of return for each account. Be sure to try different ranges.)
- Run Scenarios on Savings Rates
If you are not yet retired, it can be really motivating to model saving even just a bit more each year.
The New Retirement system lets you set different savings rates for different periods of time. It can be interesting to experiment with when you might get a raise and adding all of that extra income or just a portion of it to your savings.
Or, can you increase your savings rate by a certain percentage each year?
You can also experiment with saving to after tax or pre tax savings.
Be sure to also enter any times when you might be able to add a lump sum one time contribution to your retirement savings. Will you get a tax refund? Expecting an inheritance?
Bonus – The 5 Stages of Retirement Everyone Will Go Through
FIRST STAGE: PRE-RETIREMENT
The stage before you actually retire involves imagining your new life and planning for it. This stage can last 5 to 15 or more years before your actual retirement date.
Most people shift their focus from building their careers to focusing on the financial planning aspect of retirement. But many don’t usually spend enough time on emotional planning—making sure you have fun and find purpose in this stage of your life.
Along with your finances, you need to consider what will make you happy and fulfilled while you transition. By doing so, you can have a much smoother experience.
Emotional planning should be part of your budget. Making lifestyle decisions, such as downsizing to have more financial freedom and the ability to age in place, will help you plan for both your financial and emotional well-being.
For many, this stage is a time of excitement and anticipation. But it can also be a time for worry and doubt, especially in the year or two before retirement. Anxiety tends to set in when people worry that they won’t have enough money saved for when you actually retire.
SECOND STAGE: FULL RETIREMENT
The liberation or honeymoon phase of retirement occurs at the official beginning and can last from one to two years after retirement.
The liberation phase includes feelings of excitement, relief, and freedom from the stress and responsibilities of your day-to-day working life.
People in this stage are usually busy reconnecting with family, friends, and spouses, and spending time on hobbies, travelling, and starting new businesses.
Instead of a taking a honeymoon vacation-like path in this stage, some people choose to settle into a routine immediately, waking up each morning with a plan in place, and often continuing activities that were part of their busy schedules during their working life. And others opt for rest and relaxation after years of working demanding jobs that drained all their energy.
THIRD STAGE: DISENCHANTMENT
Once the emotional high of retiring has worn off, and the honeymoon phase is over, many people feel a sense of disappointment and disillusionment. They have spent so much time looking forward to retirement, so once it sets in, it can feel less exciting than it was hyped up to be. And they may end up feeling like something is missing in their lives.
There can be downsides such as boredom, loneliness, and feeling useless. And if not addressed, it can be easy to slip into a depression during this stage.
FOURTH STAGE: REORIENTATION
Often considered the most challenging stage, reorientation usually occurs after retirees quickly go through their retirement to-do list, feel a loss of purpose, and begin to evaluate their retirement experience.
Reorientation involves creating a new identity, and it can take some time and effort to accomplish. But once you have built a new identity, you can gain a sense of closure from your working days and move on to enjoy retirement as it’s meant to be enjoyed.
To avoid falling into a rut and depression, it’s crucial that you find something that gives you a sense of meaningful purpose later in life, such as pursuing a passion, volunteering, and adding new fun activities to your daily routine.
FIFTH STAGE: RECONCILIATION & STABILITY
This final stage may start up to 15 years after the official start of retirement. Retirees in this stage are content and hopeful in their transition and will experience less depression and anxiety.
In this stage, retirees are settled into a fun and rewarding retirement lifestyle, doing things that make them feel fulfilled. They prioritize simplifying their lives and living relaxing lifestyles.
Health conditions may be more prevalent during this stage, so retirees focus on maintaining their health and independence, sometimes by moving to retirement communities where they can age in a place with access to healthcare, amenities, activities, and friends nearby.
While not every person will experience each stage as intensely or for the same amount of time as others, most retirees will experience this process in some form once they stop working.
Like with any major transition in life, retirement comes with a whole array of emotions and worries. But if you thoughtfully plan for your transition to take care of yourself both financially and emotionally, you can help ease the overwhelming emotions of this significant life transition, and spend more time enjoying your new life to the fullest.