Planner

No, this is not the end. It's only the beginning.

  • Sorry to be the bearer of bad news, but this is an ongoing process.
  • Being a planner means that you have a good idea of what success looks like and you are preparing well.

Executing your plan.

  • You have created a budget to know how much you spend and where you can find places to save.
  • You have increased your savings rate.
  • You are investing appropriately for your age and your situation.
  • You are sticking with your plan and preparing for a successful retirement outcome.

You are a Planner.

Learn

The Bucket - Planner

Up until now, your bucket has been a mess. You're not sure where to grab it, how to paint it, and you've been sloshing stuff all over the place. The Planner is where it all begins to make sense.

The ratty outside of the bucket with its scratches and bits of paint turns into your masterpiece — shiny vision of exactly what retirement looks like for you.

On the inside, you begin to identify your sources of retirement income and how they fit together. Your savings rate and investment strategy are appropriate, for both today and tomorrow.

You have grabbed the handle and you are in control. You know how to make the income on the inside meet the demands of the outside.

You are a Planner.


Inside vs. Outside

Until now, the inside of your retirement bucket and the outside have been somewhat separate. We've talked about the correlation between the two, but due to factors such as the length of time until retirement or the uncertainty of investment returns, it has been difficult to determine how they will match up. As a Planner, you may not know exactly what the numbers will be, but you do have an idea of where you are headed and what you can accomplish.

Let's look at some general retirement planning principles through some examples. In order to satisfy NestEgg U and its department head:

What these examples are: Typical, average, commonplace, ranges, guides, suggestions.

What these examples ARE NOT: Your exact situation.

What we are trying to provide are some guidelines for you to “Prepare for a Successful Retirement”.

Replacement Income – Generally speaking, 75% of your final salary is what you will want to replace in the 1st year of your retirement. You may have some expenses that are reduced in retirement (mortgage paid off, not saving anymore, maybe a lower tax bracket, not driving back and forth to work, etc.) and some expenses that will increase, the biggest being health and medical. The net effect of these reductions and increases will generally be about 75% of your pre-retirement salary. If you were making $50,000 when you retire, you will need $37,500 from your bucket in year 1.

Replacement income will vary for you. You may end up spending more the first few years as you are active and want to enjoy retirement and the amount may decrease as you age. Be prepared and don't be surprised if the math is not exactly what you thought. It is important to keep up with your budget and modify it as needed.

Sources of Income – Currently, Social Security and employer sponsored retirement plans are probably the two biggest sources of income for retirees. If you are retiring in the next few years, the same will probably hold true. If you are younger, you have to be realistic and be prepared for the possibility that Social Security may not provide the same benefit that your parents or grandparents received.

You may also have an IRA, a part time job, and other savings or investment accounts to help fund your retirement. If you have, how and when you use these other sources is up to you, but we are going to focus on the premise of Social Security and your retirement plan being your main sources of income at retirement.

In our $50,000 example, let us estimate that $12,500 of first year income will come from Social Security. That leaves $25,000 (or 50% of your needs) that comes from your retirement plan.

Balance at Retirement – What does your balance need to be when you retire in order to generate $25,000 in your first year of retirement? What does it need to be to generate what you need in year two, year three and thereafter? That's the million dollar question. Factors such as life expectancy, investment return in retirement, inflation, and your increasing or decreasing needs as you age will have a significant impact on your retirement savings.

To generate 25 years worth of income, multiply your first year's needs by 20. In our example above, that would be 20 x $25,000 = $500,000. Assume in retirement that you have a 4% rate of return on your investments. Assume a static 2% annual rate of inflation (increase to the cost of your needs). At the end of year 25, you would run out of money in your retirement plan account.

a chart of investment per year

If you retire at 65, that takes you a few years past current life expectancy. Is that acceptable?

Get to 20 - If you need to have 20 times your first year's needs saved when you reach retirement, how much do you need to save each year to achieve that goal?

We could spend the next 4 paragraphs going through the assumptions used to calculate the exact answer. Just think about this. If you get started saving early, it's a little less than what you might think. In very general terms, if you save for 40 years, you need to save around 10% per year. The later you get started, the more you need to save. If you save for only 20 years, that number is closer to 30% per year.

It Has to Match – No matter your situation, the income generated from the inside of your bucket has to match the expenses on the outside. Maybe you can retire with $100,000 and be just fine for life. Or, you might retire with $1,000,000 and be out of money in 5 years. Don't throw in the towel if you got started saving later in life and you know there is no way you can save 30% per year. Save what you can. Save and modify the outside of your bucket. Maybe that means one or two fewer things you can do, or you may have to work a few years longer, but it certainly doesn't mean you don't save. On the flip side, don't quit saving or modify your savings habits if you have done a projection and it shows you with more than you think you will need. You can never be sure about investment returns or inflation. A little extra just might come in handy when you reach retirement.

Here's an interesting thought about getting started later in life and your spending and saving habits: Maybe you can't save enough to get to 75% replacement income and maybe 30% savings is unattainable. However, the more you save, means the less you are spending. When you spend less, you get used to living on less. It's a vicious cycle and maybe you'll find that you won't need as much in retirement as you thought. You have developed habits that make you a good spender and it will pay off.


Get it In! Grow it! Get it Out!

We can project, make assumptions, do the math and still an exact projection of what's going to be on the inside and the outside of your bucket is difficult. That's why we rely on a simple motto that explains the Planner: Get it in! Grow it! Get it out!

Get it in! Manage your spending habits to create dollars to save and increase your savings rate year after year. Knowing what you spend each year will allow to properly prepare a budget for retirement.

Grow it! (and protect it). Age appropriate investing will help you grow and protect the dollars you save. You can take more risk the further you are from retirement and you should become more conservative as you near retirement. How you invest during retirement is a function of how much you have, how much you need and your other sources of retirement income.

Get it out! You have done a great job saving and investing. How do you get the money from the inside of your bucket to pay for the items on the outside?


Distributions

Let's face it. At some point in your life you'll have to begin using the money you have saved. You know, Get It Out! But when and how do you do this? If you can wait until you are 70½ years of age, that decision is made for you. Distributions are required to begin once you reach age 70½ and those distributions are based on your life expectancy. What if you need to dip into your savings before then? Then you have some decisions to make. Each participant has a different set of unique circumstances that lead to this point. Once there though, you have to decide what to do.

Your Plan was designed to help create income for your retirement. Keep this in mind when making your distribution decisions. While each Plan differs as to distribution options available to you, there are generally three options to consider. Let's start with the easiest:

Leave your money in the Plan – Most retirement plans allow you to leave your money right where it is if your account balance meets the Plan's requirements. Even though you may no longer contribute to the Plan, you may continue to access your account by going to nesteggu.com and logging into your account. You may continue to have access to information about the investment options offered in the Plan. You may continue to direct how your account balance in the Plan is invested and you can decide when you want to request a distribution. You don't have to decide until you reach 70½ years of age. This option allows you to take time to figure out your next steps. You don't have to rush to make decisions. This option also has a couple advantages. First, your account balance is protected from creditors as long as it remains in the Plan. Second, the cost of investing your money may be less. 401(k) plans generally have no transaction fees and no investment loads. Most plans use institutional share classes with lower expense ratios. The more you save, the more you have for retirement.

If you have questions about what your account balance must be to leave it in the Plan, contact the Customer Solutions Center at 866-412-9026.

Cash in your Plan Balance – You may cash in your Plan account by taking a Lump Sum Payment. If you need the cash, this option will serve that purpose. However, if you do this, you forfeit the benefits of tax-deferred compounding and you'll have to pay income tax on all pre-tax contributions and their earnings for the tax year in which you take the distribution. If you are under age 59½, you will also incur a 10% early withdrawal penalty unless you meet one of the exceptions stated in the Internal Revenue Code. Keep in mind, this money was supposed to be for retirement. If you use it before you retire you won't have it when you decide to retire.

Rollover your Plan Balance – Rolling over your Plan account balance helps you continue towards your long-term goals. If you terminate your employment with one company and go to work for another company, you may rollover your money into your new employer's retirement plan if they have one. If they don't, you may always rollover your money to a Traditional or Roth IRA that you establish. If you terminate your employment and you don't seek other employment, you may still rollover your money to a Traditional or Roth IRA. Leaving your money in any form of a retirement plan gives you the best probability of achieving your long-term retirement goals. The money remains invested and it grows tax free until you begin to receive distributions. The tough choice is choosing where to move your money once you have decided what you want to do.

IRAs have a little more flexibility when it comes to distributions. With a Traditional IRA, you can schedule periodic payments to meet your income needs. Those payments can be sent to you monthly, quarterly, annually—whatever timing you choose. You can specifically request a distribution at any time from your Traditional IRA. You don't even have to begin distributions until you are 70½ years of age. At that point, you must take required minimum distributions.

If you rollover to a Roth IRA, you never have to take required minimum distributions. The money stays in the Roth IRA and stays invested until you need it or at some point after your death when your designated beneficiaries may need it.

There are many considerations when determining the best solution for your rollover. Employer sponsored retirement plans and Traditional and Roth IRA's all have different features and all come with different investment choices and costs. There is not one solution that is a perfect fit for everyone.

If you are looking for help in making your decision, you may contact the NestEgg U Customer Solutions Center by calling 866-412-9026.

You may be searching for a solution to a temporary problem and cashing in your Plan may seem like the easy alternative. Your distribution options can also be combined to allow you to gain access to some of the funds immediately, while preserving the remaining balance for some time later. In short, you may be able to cash in a portion of your Plan and rollover the balance to another employer sponsored retirement plan or Traditional or Roth IRA.

Whatever option you choose, NestEgg U is here to help.

Act

Retirement Budget

Download Budget Worksheet

Ready to move to the next course?
Spender > Saver > Investor > Planner