10 Years From Retirement: What Should I Be Doing?

10 Years Away From Retirement: What Should We Be Doing?

Heidi asks: “We’re 10 years away from retirement.  What should we be doing to prepare? Should we pay off our mortgage before we retire?”

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Transcript: 10 years from retirement: What should we be doing?

We want to retire in about 10 years. What’s the best way to prepare for that? And is it best pay off our house before retiring?

Still in growth mode

If you’re 10 years away from retirement, you still should be in growth mode. This means you’re more heavily invested in stocks. You’re looking to pursue higher returns.

Over the next decade, bonds aren’t going to help you a whole lot. You’re looking at 1% to 2% returns going forward based on current yields.

If there is a major downturn in the stock market, you have some time to recover from that. Even though we’re not out of this bear market yet, there could be another one in the future. You’re still going to be able to recover. If we do have that downturn again, it becomes a great buying opportunity. You may never find prices that low again.

Volatility shouldn’t be a significant concern at this point. As you get closer, when you’re five years away, that story may change. But, right now, you still have the ability to enjoy those compounded returns. If you can save and invest for higher returns, it should pay off for you in the long term.

I wouldn’t have any problems being 100% invested in stocks for the next four or five years, if I were you. I think the benefits will outweigh the long term risk. It could be tough to do. When you have those volatile times, nobody likes to see their balances go down. But again, I think the growth will be significant for you.

Eliminate debt

Should you pay off your house before you retire? If you can do so in a reasonable fashion, absolutely—yes! In fact, you should try to have all your debts paid off by the time you retire. That means car payments, your mortgage, and credit card debts. The fewer expenses you have, the better your retirement is going to be.

Retirement is all about cash flow. In our experience, the biggest reason people run out of money is because they spend too much. And debt payments are a form of spending. So the more you spend to pay debts, the less you have to do other things. Or it could mean you have to take more money from your nest egg than you should.

Eliminating debt can be a huge boost to your retirement plans as a whole.

Here are some other things that you want to do

Know your Social Security numbers…

Get your Social Security earnings record and benefit estimates. This is going to be a key component in helping you plan for retirement. It will help you make good decisions about when to start your Social Security benefits. And for most of us, it’s still a key part of our income.

Get organized

Get things organized. Understand where all your accounts are and how they’re invested. This allows you to create a better plan.

What does retirement look like?

It’s too soon to do detailed budgeting. But at the same time, you can start thinking about what your retirement is going to look like. You can think about what you want to do in retirement. Then you can see how much it will cost.

Health insurance

Have a good idea of what your health insurance is going to be if you’re going to retire before age 65. This is huge. If you have to go out and buy your own health insurance, that’s a big expense that you’re going to incur. You want to know what that’s going to be because it will have an impact on the numbers.

Work on your current cash flow

The last thing I would suggest is get your current cash flow situation in order. Know where your money’s going. Know how you’re spending it. If you can rearrange things to focus more on saving and eliminating debt, you’ll be glad you did. You have to make those things a priority. When you do that, you’ll have some flexibility and freedom in your retirement.

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10 Years From Retirement

 

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Financial Planning

About the Author

Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors.    He specializes in helping hard working, middle class families plan for retirement.

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3 Ideas to Plan For Lower Returns

3 Ideas to Help Plan for Lower Returns

What we earn on our nest egg is a key component to our future plans. Over the past month, we talked about the potential impact of both lower bond and stock returns. What can you do to prepare for this? Today we’ll share 3 ideas to help you plan for lower future investment returns.

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Check out the other episodes from this month...

All month long, we’ve talked about the possibility of lower future returns for both stocks and bonds.  

What happens if future returns are less than historical averages? Bond yields indicate the future results from those investments could be well below their averages. And many “experts” believe future stock returns could also be less. This combination creates some significant challenges as you head into retirement.

Here are 3 things you can do to plan for lower future returns.

1. Delay Your Retirement

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Delaying your retirement improves your Social Security and pension benefits (if you will receive a pension). This works three different ways.  It shrinks the discounts you face for early retirement.  It increases your primary benefit. Or, with Social Security, you can receive delayed retirement credits. 

Waiting to retire also helps solve a problem with health insurance in retirement.  You are eligible to receive Medicare at age 65.  This means you won’t have to buy an expensive individual health insurance policy. 

Delaying retirement also allows you to reduce debt, save more, and benefit from compounded returns.

2. Monitor Your Spending

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In my experience, the primary reason people run out of money in retirement is overspending. The more you withdraw from your nest egg, the higher the chance you deplete your savings. Take a good look at your retirement budget. Try to find expenses or costs you can eliminate.

3 ideas to help plan for lower returns

3. Own More Stocks

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Investing involves a trade off. Trying to earn more can mean the short-term shocks are more severe. But, it may be necessary to consider an allocation that provides more opportunities for long-term growth. This may be hard to do, considering we haven’t completely recovered from a pretty steep drop. But in the long-run, the risks could be worth it, even if it is for a short period of time.

Be Flexible

It is important to be flexible.  The plans you created may need to be adjusted as the world around us changes.  None of us know what future returns will be.  But we need to consider what happens if future returns are lower.  Making good decisions now can help improve your chances for longer term success.  And, if things turn out better than expected, everything will be fine.

3 ideas to help plan for lower returns
3 ideas to help plan for lower returns

 

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Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors.    He specializes in helping hard working, middle class families plan for retirement.

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Is the 4 Percent Rule Dead?

Is the 4 Percent Rule Dead?

Over the past two weeks, we’ve discussed expected future returns for both stocks and bonds. Several experts feel the future results will be much lower than historical averages. So that makes us wonder, “Is the 4 percent rule dead?”

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Lower expected future returns for both stocks and bonds can affect your retirement. Many “experts” expect stocks to produce below-average returns over the next decade. They forecast somewhere in the neighborhood of 6.5% per year. They also expect lower returns from bonds—somewhere between 1 and 2 % per year.

Lower Future Returns and the 4 Percent Rule

If these lower returns happen, it can create a major challenge for retirees. If these predictions hold, a well-balanced portfolio would earn somewhere between 4% and 5% per year.

Is the 4 percent rule dead

For the past 20 years or so, we’ve been big believers in the 4% rule for generating retirement income. This rules says you can take 4% of your retirement savings as income. So if you have a $500,000 nest egg, that translates to $20,000 per year or $1,666 per month.

Why Do We Believe in The 4 Percent Rule?

We use this guideline because it reduces the risk of running out of money during your lifetime. This has been back-tested during some of the biggest bear markets, and it has a high rate of success.

When you use historical return data, you can see why. Historical data shows a 60% stock-40% bond portfolio should grow by about 7% per year. So if you only take 4%, you would expect your account to grow by 3% per year. That’s enough to help your income grow each year to maintain your purchasing power.

What if Returns are Lower?

But what happens if the experts are right? What if those returns are less than average? Does the 4% rule still work?

In theory, if you earn at least 4% per year, you can take that much income and still maintain your principal. But there are a couple of things that come to mind. First, your odds of success will decrease a little. And, your ability to grow your principal to grow your income is also limited.

The second thing: what if you need to take more than 4% from your savings?  A lower return environment going forward means you will increase the risk of running out of money during your lifetime.

Balancing Risk and Reward

Financial planners always talk about balancing risks and rewards. And the amount of income you take from your retirement savings is a perfect example. The 4% rule is simply a guideline to help you think about that risk. And even with lower returns expected in the future, it still has merit.

No matter what future returns are, one thing remains true. The higher your withdrawal rate, the more you risk running out of money. If you are unsure of how this impacts you, talk to a financial planner.

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Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors.    He specializes in helping hard working, middle class families plan for retirement.

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Are Card Rewards Worth It?

Are Credit Card Rewards Worth It?

Are credit card rewards such as cash back or travel perks worth it? Should you use multiple credit cards to get better rewards? 

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Are Credit Card Rewards WOrth it

On May 9th, the Marietta Times ran an article written by NerdWallet. “Why Family Loyalty Shouldn’t Apply to Your Credit Cards.”  It encourages people to shop for things like cash back perks and travel rewards. It also encourages people to consider using multiple cards to maximize those rewards.

Are The Rewards Worth It?

Are credit card rewards worth it? You know those frequent flyer miles or cash rebates for your purchases. For some people, the answer is yes. I’ve personally benefited from using travel rewards on my credit card purchases.

But there is a caveat. The rewards are only worth it if you pay your full balance each month.

The Basic Math…

You buy $100 worth of groceries. Your card gives you 2% cash back, so you get a $2 reward. If you pay your bill, it’s $2 in your pocket. But if you only make the minimum $10 payment, you’ll spend more in interest than your perks are worth. And that will happen in two months or fewer too

Are Card Rewards Worth It?

Should You Use Multiple Cards?

I think this adds more complexity than it’s worth. You have to keep track of more things, make more payments, and stay more organized. From my experience, simple is better, cleaner, and reduces mistakes.

Are You Ready to Retire?

If you are 50 or older, and thinking about your retirement, click here for a free retirement assessment.

The Verdict: Good for Some, But Not Everyone

You have to be very careful with these so-called perks. They can be a perverse incentive. They can give you the rationalization to use your credit card, even if you can’t pay the balance each month. And they can cause you to spend more than if you were using cash or a debit card.

Are the perks and rewards worth it? For some, yes. But you must do it responsibly. If you can’t pay for all your purchases each month, the rewards don’t matter.

Worth it Credit Card Rewards
Card Rewards Worth It
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Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors.    He specializes in helping hard working, middle class families plan for retirement.

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3 Questions To Help Evaluate Your Cash Flow

3 Questions to Help You Evaluate Your Cash Flow

The COVID-19 Pandemic forced a lot of major changes to our lives. IT has also created a unique opportunity to gauge how we spend money. Today, we’ll pose three questions to help you evaluate your cash flow.

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Questions To help Evaluate Your Cash Flow
3 Questions to Evaluate Your Cash Flow

A week ago, we talked about the importance of building your financial safety net. One of the first steps was to take a hard look at your spending. Today, we have three questions to help you evaluate your cash flow.

Question 1

Evaluate Your Cash flow

The things you really enjoyed—the activities that added value to your life, you’ll find a way to do them again. Eliminating the ones you don’t miss and the costs associated with them, can help you get your budget back on track.

Question 2

Questions to Help Evaluate Cash Flow

Was it that fancy cup of coffee, or breakfast sandwich on the way to work? Could it be something bigger? If you haven’t missed it when you were forced to stop buying it, you don’t have to start just because you can. You may find that many of those little things can add up to a lot of money each month.

Question 3

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When things get tight, we start to look at the details. It’s easy to identify the line-items on your bank statement that cause you stress. It could be the amount you spend eating out. Or, that pesky gym membership you don’t need or use. And then there are all those subscriptions. It could be something even bigger like a car payment.

Weigh the stress of those expenses now that times are tight to see the true value they provide to your life. If those two things are “out of balance,” take some time to clean them up.

Remember, there are no wrong answers to those three questions.

This pandemic forced us to alter our spending habits. In the process, it revealed what was essential, important, and truly valuable to our lives. And that can help us make better choices about money going forward. It can help us build our financial safety net and save for our future.

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evaluate your cash flow questions
Questions to Evaluate Your Cash Flow

 

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Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors.    He specializes in helping hard working, middle class families plan for retirement.

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Earning Compound Interest

Earning compound interest can make you money.  Potentially it can make you a lot of money.  Today we’ll show you two examples of how you can benefit from compounded returns.

This is part 2 of our Compound Interest Series.  Part 1: Paying Compound Interest, can be found here.  

Watch: Earning Compound Interest

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Free Download: Earning Compound Interest

Compound interest is a tricky subject.  We created a download  you can use to help better understand how you can benefit from compounded returns.  Click on the button to download your copy .

Paying Compound Interest

Earning Compound Interest: The Basics

There are two key components. First is the return you earn. When we are saving and investing, we have many choices. Some investments have greater earning potential than others.

The second key component is time. The longer you can let your money compound the better.

Here is our first example. This is something as a financial planner you learn on day one.

You contribute $2,000 per year at the beginning of every year, and you do this for 40 years—$80,000 total. And you earn the long-term average return of the stock market, which is 10%. It grows to nearly a million dollars.

This was the “pitch” you learned to convince someone to make an IRA contribution. But let’s take a look at how the returns you earn impact the totals.

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The Impact of Time and The Cost of Waiting

We said earlier, time matters. In fact, time might be your biggest asset as a saver. Here is another example from day one of financial planner school.  And it illustrates the cost of waiting to start saving.

Investor A: Save Early

Investor A starts saving $2,000 per year at age 25. She continues that for 20 years and stops. And her future returns average 10% per year.

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Investor B: Wait To Save

Investor B doesn’t start saving until he reaches age 45. He uses the same investments and earns the same 10% average return.

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Waiting to start saving means you have to save more to achieve the same result.  In this example, Investor A saved $40,000 total and reached $850,000.  Investor B had to save $13,500 per year, or $270,000 total, to accumulate $850,000 at the same time.  

The impact of compound interest isn’t linear. It’s exponential. And when you understand how it works, you can alter your future for the better. Teaching younger people to save early in life is critical.

What's On Your Mind?

Do you have a question about what’s happening in the world of finance or investing?  Is there a topic that has you curious?  We’d love to hear from  you.

 We’ll do our best to answer it in a future episode.  To submit your question, fill out the form.  If you prefer, you can send us an email directly.  That email address is neal@flemingwatson.com

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Financial Planning

About the Author

Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors  He typically works with people who are planning for retirement.  Fleming Watson is a Registered Investment Advisory firm located in Marietta Ohio.  Our firm primarily serves Marietta, Parkersburg, Williamstown, St. Marys, Belpre, Vienna and the surrounding communities in Washington and Noble Counties in Ohio and Wood and Pleasants county in West Virginia.

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Do You Need A Million Dollars To Retire?

Do You Need A Million Dollars to Retire?

For some reason, people are fixated on this big round number. Some people will need at least that much if not more. Others will be able to make it work with less—sometimes much less.
We’ll talk about the factors which determine the answer to the “how much” question. And we’ll give you a brief example of how much income a $1,000,000 nest egg can provide.

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