This paper outlines a five-step framework for young adults to achieve financial security in retirement. The steps include calculating anticipated expenses adjusted for inflation, determining funding sources including Social Security benefits, selecting a qualified financial planner through careful vetting, working with the planner to develop a comprehensive plan and Withdrawal Policy Statement, and committing to the plan with adjustments as needed. By starting decades before retirement, young adults can use compound growth and long-term planning to build a well-funded retirement income strategy.
An individual should start planning for a financially secure retirement decades before he or she needs it. There is a great deal of good and bad advice about financial planning, but there are about five common sense steps that an individual can make toward a well-funded retirement. While the future is uncertain, adhering to a well-researched plan for his or her own circumstances gives an individual the best chance of a comfortable retirement.
Elderly people come from all walks of life and income levels. However, there are basic steps and tools available to assist a person in early adulthood (aged 18–30) in planning for financial security in retirement. A young adult has the benefit of decades for planning and can take full use of these steps and tools.
The first step is to calculate anticipated basic retirement expenses plus enjoyment expenses, adjusting them for inflation as accurately as possible (Guyton, 2014). Rather than blindly hoping that all basic expenses will be covered by whatever income will be available, the person should literally list basic life expenses and adjust them for inflation as of his or her retirement age. Those expenses would include mortgage or rent, utilities, home maintenance, transportation (both private and public), groceries, clothing, taxes, and insurance premiums for home, car, and medical care.
The individual can probably best draw up his or her future list by listing current basic expenses. In addition, he or she can use a sample expense sheet such as one provided by Vanguard Group, Inc. (Vanguard Group, Inc., n.d.). Once the person has totaled his or her anticipated expenses in retirement, he or she should add sums for activities that he or she would occasionally enjoy, such as vacation trips and hobbies (Guyton, 2014). After totaling basic and enjoyment expenses, he or she must calculate the impact of inflation on that total.
A good, simple inflation calculator is offered by InflationData.com to give a good ballpark estimate of the monthly amount that will be needed for basic expenses in retirement (McMahon, 2014). The Social Security Administration provides a retirement estimator tool to help with this process. Depending on the number of years the person intends to work before retiring, the total adjusted for inflation could be shocking.
The second step after totaling anticipated expenses and adjusting them for inflation is to determine how all these expenses will be funded. Social Security retirement benefits may cover at least some of the expenses. The Social Security Administration offers a calculator to estimate retirement benefits (U.S. Social Security Administration, n.d.). Many people will need an additional source of income through work or independently.
After subtracting estimated Social Security retirement benefits from the total anticipated expenses, the person will have a reasonable idea of the additional income needed to fund all expenses unfunded by Social Security. At that juncture, the person is ready to determine other sources of funding, which may include investment accounts, pension plans, or part-time work during early retirement.
The third step is to find a financial planner, either through work or independently (Guyton, 2014). Apparently, there are thousands of financial planners, some good and some bad. Choosing the right financial planner may involve interviewing several of them and asking key questions.
Critical questions to ask include the following: What experience does he or she have? What are their educational credentials? What services are offered? What is their approach to financial planning—neither too aggressive nor too cautious? What types of clients do they usually work with? Is he or she the only financial planner who will be working on the plan, and if others will be involved, what are their names for background checks? How will he or she be paid? What is the typical charge for his or her services for this type of planning? Are there any conflicts of interest in which someone else might gain from the financial advice he or she gives? Who regulates his or her profession, and has he or she ever been disciplined for unlawful or unethical actions?
The Financial Industry Regulatory Authority (FINRA) and the client's state insurance and securities department will have records of disciplinary actions against the financial planner and other financial planners working with him or her (Certified Financial Planner Board of Standards, Inc., n.d.). Based on the person's interviews of possible financial planners and reviews of background information, the person is ready to choose the appropriate financial planner for his or her retirement.
The fourth step is actually working with the financial planner. A person can hire or use a financial planner to merely set a plan or also for ongoing advice and guidance. For a mere plan, the financial planner can be paid an hourly fee or flat rate; for ongoing assistance, a financial planner can be retained to oversee the person's financial plan.
The financial planner can help review the person's anticipated expenses and inflation figures, explore the best funding sources for those expenses, and plan the best way to fund those sources while the person is still working. The planner can also help the person understand federal and state tax consequences and, very importantly, draw up a Withdrawal Policy Statement that helps the person stick with his or her plan while adjusting for changes along the way to retirement (Guyton, 2014).
The Withdrawal Policy Statement will govern when, how, and in what amounts withdrawals will be made from the person's nest egg to fund his or her retirement expenses. The statement also accounts for emergencies, shifting markets, and other triggers for changing the timing, method, and amounts to be withdrawn. It allows the person's retirement income to stretch and cover all his or her expenses during his or her entire retirement.
"Execute plan and adapt for life changes and emergencies"
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