While retirement is a top concern for many Americans, most need help understanding financial jargon and implementing simple habits that will boost their savings over the long term.
A practical, measurable approach to retirement can help people tackle the daunting task of saving enough to sustain themselves through their golden years.
Related: How average Americans can better plan for their retirement income and 401(k) plan
In a recent interview with TheStreet, Bob Powell discusses some minor changes consumers can make now to prepare for a comfortable retirement. In addition to making sure you're consistently putting money toward a retirement plan, Powell recommends planning out the details of how much you'll need in total and allocating that total toward necessities like housing, transportation and insurance.
Plan for retirement: identify sources of income and recurring expenses
There are a few key ways that every person saving for retirement can maximize their savings, one of which is universal to everyone: implementing a precise spending plan.
Powell suggests that having a nest egg is only half the battle. Outlining expenses and income sources will help retirees understand how much they will realistically need in the long term while also being mindful of their spending.
“First, make sure you’re saving, but also know what you’re saving for,” Powell said. “It’s one thing to have a lot of money, but it’s quite another to figure out your expenses in retirement.”
“How much do I need to accumulate to fund 30 years of housing? That’s 30 years of transportation costs, 30 years of insurance and 30 years of taxes,” he continued. “Where is that money going to come from? Is it going to come from a 401(k) or a Roth IRA? Is it going to come from Social Security? Am I lucky enough to have a defined benefit plan? So you really have to think about what you have and how you’re going to spend that money.”
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Another key component of effective planning is taking into account risks that affect overall savings and quality of life, such as inflation.
“I think of retirement as all the risks you’re going to face,” Powell said. “I think people need to think not only about the expenses they’re going to face in retirement, but also how they’re going to manage and mitigate all of these different risks, and the tools they’re going to use to manage and mitigate some of these risks will be different.”
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“I mentioned inflation risk,” he added. “You might want to make sure you’re investing in stocks to keep pace with inflation so you don’t experience a decline in your standard of living. On the other hand, longevity, the fear of outliving your assets, is a very real risk you’ll face.”
Investing in stocks does not always allow you to manage and mitigate that risk. Still, annuities (income annuities and tax-deferred annuities) are tools that can be used to manage the risk of outliving assets or longevity risk.
Powell notes that outliving your savings, negative market returns, the death of a spouse and a change in housing needs are all unexpected challenges that need to be accounted for in a retirement plan.
Related: How to Maximize Social Security Survivor Benefits in Retirement
How young savers can combat present bias
Powell delves into present bias, an affliction that tends to affect younger generations more, but which we all experience. Looking at life holistically rather than just at the present moment can help savers build the future they envision.
“One of the topics that’s become very popular to talk about in the financial planning profession these days is about the behavioral biases that people have when they think about saving for retirement,” Powell explained. “One of the terms that many people are probably unfamiliar with is something called present bias, which refers to the tendency for people to give greater weight to payments that are closer in the present when considering trade-offs between two future payments.”
Powell notes that finding the right balance between enjoying life now and living within your means will help you live comfortably in the future.
“People need to understand their biases, especially when it comes to money,” he said. “Present bias encapsulates that notion of fear of missing out, or living for today and not tomorrow. I care about the present and I care about the money I have in my pocket today. So if I had to go back in time, I wish I had a better understanding of present bias.”
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