By FPA member Rita Cheng, CFP®
Last Updated: July 12, 2010
The definition of control is to exercise authoritative or dominating influence over something or someone. To control also implies the power to direct or determine the outcome of a particular event. While you may not exert control over stock market volatility or the behavior of elected and corporate leaders, you can control how you react to these events. When external forces beyond your control converge to erode your personal wealth, it can be difficult to gain perspective on your situation and may negatively impact your ability to plan for the future. Although stress can motivate you to take corrective action to improve your financial situation, too much stress can have the opposite effect. Stress can negatively impact your physical and emotional health, further jeopardizing your ability to defeat inertia and regain control of your financial state of affairs.
Although you do not have control over “external” factors, such as tax rates, inflation, stock market performance or health care costs, you do have control over other factors. Successful retirement planning involves adopting a proactive approach to factors that can impact your quality of life today and in the future. Understanding that you can exert influence and control over certain factors affecting your retirement is empowering, thereby giving you the confidence to affect change.
Retirement planning not only incorporates the past (i.e. what you have done thus far to prepare), but it also includes the future (i.e. evaluating the available choices and understanding the impact of your decisions). You are in the “driver’s seat,” meaning you boast a position of control or authority over certain factors that affect your retirement. Some of the factors that you can control and influence are listed below:
Annual Retirement Savings
How much are you currently saving/investing for retirement? Are you maximizing your employer sponsored retirement plan? Are you taking advantage of catch up contributions? Are you contributing to either an Individual Retirement Account (IRA) or Roth IRA?
Proportion of Savings/Investments in Retirement Accounts Versus Non-retirement Accounts
What is the proportion of your retirement savings that is invested in tax qualified accounts versus non-qualified accounts? A non-qualified investment is one that does not qualify for any level of tax-deferred or tax-exempt status. A qualified plan is one that satisfies the requirements of the Internal Revenue Code Section 401(a) and the Employee Retirement Income Security Act of 1974 (ERISA) and therefore eligible for treatment. Qualified retirement plans allow employers to deduct annual allowable contributions for each participating employee. The contributions and earnings in a qualified plan are tax-deferred until withdrawn.
Asset allocation refers to the art and science of designing a portfolio to balance risk and reward by dividing or “allocating” your investment portfolio among the three major asset classes: equities, fixed-income, and cash and equivalents. Your specific financial goals and objectives, time horizon, capacity for risk, tax bracket and cash flow restraints all determine the composition of your investment portfolio.
Date of Retirement
It is important to understand the difference between your retirement eligibility date and your retirement feasibility date. Just because you are eligible to retire does not necessarily imply that it is feasible. Many individuals who have accumulated enough wealth to retire may decide to continue to work. In these cases, earning an income is an ancillary benefit. Perhaps they have decided to continue to work as a means to obtain affordable health care. In other situations, some individuals chose to leave the corporate world and enter the non-profit arena.
It is important to take an inventory of your expenses so that you aware of what you will need for your retirement. The transition from investing your paycheck to creating a paycheck is one that requires retirees to take responsibility for their own future. Therefore, it is imperative for you distinguish fixed expenses from discretionary expenses and variable expenses.
Health and Wellness
Too many people overlook their state of health and neglect to include good health and wellness as essential elements of a successful retirement plan. According to the results of a study released by Fidelity in March 2008, a couple retiring this year will need about $225,000 in savings to cover medical costs in retirement. This figure represents an increase of 4.7 percent from the $215,000 estimate for 2007. A separate study released by the Center for Retirement Research at Boston College in 2008 estimated that an individual would need to earmark $102,000 for health care expenses in retirement, while a couple would need $206,000. Unfortunately, too many people spend their health to accumulate wealth, only to have to spend their wealth to regain their health. So, yes you are correct in concluding that maintaining your health and wellness in retirement is a sound investment.
In closing, just as Yogi Berra once said, “The future ain’t what it used to be.” Focusing on the aftershocks of the global financial crisis can leave you feeling as though you have no control over your financial future. It is important to focus on the factors that you can control. Remember, retirement is not a one-time event, rather a journey. You are in the driver’s seat and in control of your financial destiny. Enjoy the ride.
FPA member Rita Cheng, CFP®, is a financial planner with Ameriprise Financial in Bethesda, Md.