Planning for Your Retirement: 4 Essential Steps
It may feel like the distant future, but to retire comfortably, you need to start planning straight away. Recently, J.P. Morgan Asset Management published its yearly retirement savings guide and conducted an investigation into the spending behavior of 5,000,000 households to gain a more comprehensive understanding of how retired people spend. Below are the four lessons we should learn from this work.
1. Volatility happens, hold your nerve
When the market changes and your retirement savings decline, it is easy for panic to set in. However, in the long term, abandoning the stock market and taking all your money out can be more damaging than market volatility. Stick with your long-term retirement objectives and don’t let fluctuations in the market frighten you.
J.P. Morgan Asset Management reports that despite double-digit market declines in over half (22) of the previous 39 years, positive returns still resulted at year-end in three-quarters of market decline years. J.P. Morgan Asset Management’s Head of Retirement Solutions, Anne Lester, explains that many people panic when their stock market portfolios shrink, particularly people who are already retired and living off their savings. Younger people are less likely to take fright.
2. As you get older, take fewer risks
When you retire, you will, of course, no longer be drawing a salary. So, it is essential to develop assets well before retirement. To achieve a strong asset portfolio, you should balance and diversify your investments and consider your expectations about your lifestyle as a retiree.
When you reach your 40s and certainly when you reach your 50s, you need to take a long look at where you are heading financially. If you aren’t setting yourself up to enjoy the lifestyle you want in retirement, it may be time to change direction and treat your finances differently.
3. Spend less, spend smart
If you stop spending, you will save more. This is a simple equation but not everyone has the option of reducing their spending. However, J.P. Morgan has discovered that, irrespective of socio-economic status, people spend less when they head into the mid-50s.
As Lester explains, typically, someone in their mid-50s who has children will see them leave home at this time and thus subtract themselves from household expenses. Moreover, often, house renovations are complete by then and the activities and products you spent money on in your 40s are no longer of interest to you in your 50s.
Lester adds that some can choose to work beyond retirement age, especially if their financial situation does not enable them to stop earning. Nonetheless, if you are in your 60s and facing retirement, Lester says that it’s time to get real and look at what you have and how you can change your lifestyle to make it work.
4. Flexibility is key
The J.P. Morgan survey reveals that retirees do not reduce their spending the moment they enter retirement. Instead, as they prepare for a new chapter in their lives, retirees tend to spend early on in their retirement. Moreover, J.P. Morgan finds that volatility can be a feature of spending not only in early retirement but throughout.
Lester advises people to review their finances every five years to allow them to correct the financial course they are taking. According to Lester, it’s important to be flexible in your habits and check in and recalibrate your spending periodically. ‘People’s values change.’ Lester explains. ‘People’s economic circumstances change.’
