The best advice you can get on preparing for your retirement might come from those who have done it before: retirees.
In a new study from the Employee Benefits Research Institute (EBRI), called Thoughts from retirees (PDF), retirees share their thoughts on past financial decisions and current financial worries. You may be able to use this information to improve your retirement plan and avoid some financial stress during your retirement years.
Read on to discover three retirement plan action items inspired by real-world experience.
1. Save and invest more
More than two-thirds (70%) of retirees surveyed wished they had started saving for retirement earlier.
There’s a simple rule of investing that demonstrates how important time is to your bottom line. Called the Rule of 72, it’s a formula that estimates when your invested funds will double. Simply divide 72 by your projected growth rate. The answer is your doubling time.
A reasonable growth rate is 7% per year after inflation, which is the long-term stock market average. At this rate, your money is doubling approximately every 10 years. So $50,000 invested today is $100,000 in 10 years, $200,000 in 20 years and $400,000 in 40 years.
Here are the takeaways: The money you invest today could quadruple in 40 years. Alternatively, if you put off investing for 10 years, that halves your 40-year growth potential.
2. Set financial goals
Only 42% of retirees surveyed said they had identified financial goals in retirement and documented a financial plan. But retirees need to be comfortable pursuing and achieving financial goals. Confidence in this area enables them to adapt quickly to rising inflation, emergency expenses, and other unforeseen circumstances.
Why not build that confidence now while you’re still working? Knowing that you can achieve financial milestones serves you well for the rest of your life. It’s also a key part of creating the lifestyle you want in retirement.
You could start with a big long-term goal, like saving 20 times your annual salary before retirement. Simultaneously, you can pursue one or two smaller contribution goals with shorter timelines. Examples are:
- To buy a house
- Establish and follow a budget
- Store enough money to cover your living expenses for six months
- Develop your skills as an investor
- Paying off high-interest debt
Learn how to achieve these goals in your working life and you’ll have an easier time managing your money in retirement.
3. Plan for inflation
More than half (54%) of retirees surveyed cited inflation as their top financial concern.
You can deal with future inflation now by building your portfolio of appreciating assets and increasing income streams.
Valuing assets. Popular appreciating assets include income-generating stocks and real estate. Stocks can dip during periods of inflation, but they outperform inflation over the long term.
When it comes to real estate, rents and property values tend to rise with inflation. Even better, you can finance an investment property with a fixed-rate mortgage, which stays the same regardless of how inflation or your rental income changes.
Increased revenue streams. Higher-dividend stocks can provide you with the growing income you’ll need in retirement. Dividend Aristocrats are popular choices. These are S&P500 companies that have increased their dividends every year for at least 25 consecutive years.
While no dividend is guaranteed forever, Dividend Aristocrats are about as reliable as it gets. These companies have a proven and enduring commitment to paying dividends.
RIB Thoughts from retirees survey polled 1,109 U.S. retirees between the ages of 55 and 80 in the spring of 2022. All respondents had at least $50,000 in financial assets.
Create the retreat you want
Use the perspective of today’s retirees to avoid common financial regrets and stressors of your senior years. Saving and investing aggressively, setting financial goals and planning for inflation are smart moves that will support your efforts to create the retirement you want.