Look Out Below: Building a Retirement Floor

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Having enough money during retirement to cover basic needs like food, shelter, clothing and healthcare is an absolute necessity—the foundation you have to live on. But building that kind of retirement takes thoughtful planning, organization and discipline.

Research suggests that you will need between $30,000 and $50,000 a year in present value dollars to meet the most basic needs in retirement. The total amount of funds you’ll need to cover these basics is your “retirement floor.” In general, most people will have some of this expense offset by social security and possibly pension payments. But there may still be a gap each month, and that gap must be considered along with your basic needs when building your retirement floor. Below are four steps you can take to help ensure your retirement floor is solid once you take that next step in your life.

1. Plan

Planning is the most crucial step in any financial strategy. Considering topics such as children, careers, lifestyle, savings and future inheritance are important issues and will help you determine how much of your income you will be able to contribute to retirement during your early and mid life. Also, if you have a spouse, understanding common expectations for retirement, such as whether you will need to travel to visit family, whether you will downsize your home, whether you will have a mortgage payment or own only one vehicle are all important factors to agree on early on so you can plan to cover your necessary expenses in your retirement floor.

Once you have a direction that has been determined by your goals and comfort level, develop your strategy for building your retirement floor. In your planning, think about investment risks and make provisions for unforeseen events, such as medical expenses or periods of unemployment. Most experts agree that six months of wages should be set aside in an emergency fund using a readily available savings or money market account. In addition to your emergency fund decide how much you are going to save. A good starting point is 10% of your after-tax income. But no matter how much you can save, it’s important that you decide what you need for your retirement floor and how much discretionary income you would like to have. Then, talk to a knowledgeable financial advisor about how to get there.

2. Organize

Decide on where you will keep your money, how you will pay bills each month and—if you are married or both work--how each of you will contribute toward your retirement savings. Make sure to have a conversation with your financial advisor and spouse at least once a year to evaluate your life situation, examine your finances and decide whether you need to make any adjustments to your spending or saving to meet your goals. These simple organizational steps will help keep you on track.

3. Build

Now that you have a plan, begin to follow your plan. Diversify your assets in a mix of investment types. In other words “do not put all your eggs in one basket.” Consider purchasing stocks in diversified industries as well as other investments such as bonds, fixed annuities or mutual funds that can provide more stability.

Traditional pensions or “defined benefit” plans that many earlier generations enjoyed are becoming a thing of the past. More common today is the employer’s offering of a 401(k) or 403(b) retirement or investment plan. The basic plans will offer from five to ten different investment options. You are leaving free money on the table if your employer matches a percentage of your contribution dollar for dollar and you are not contributing enough to receive the match. Also, the geometric progression of the repeated contribution can be astounding over time. It’s an essential component of a stable retirement floor. If you change jobs, you can roll the funds in your 401(k) into a new employer’s plan or place it in an Individual Retirement Account (IRA).

Anyone in mid life should also strongly consider a life insurance and disability insurance policy. Life insurance will provide a death benefit for your family or other beneficiary and can help offset contributions that the policy owner would have made to a retirement fund. Disability insurance can supplement your emergency account to pay bills, and even help you maintain saving levels during a time of temporary or permanent disability, providing peace of mind and easing the financial burden during unforeseen events.

4. Execute

Now that you have planned, organized and established your retirement floor, think about steps you can take to protect your wealth and ensure your floor remains solid for years to come. Your retirement floor will require maintenance, just like any business or well-oiled machine. Your first step to maintain control is to establish a budget. If you have been diligent in your annual planning meetings, you should understand exactly what expenses you will have each month, how much you will have to draw from your funds to meet those expenses and how much you will have for discretionary spending such as travel.

At this phase, it is also important consider ways to ensure that your retirement floor is there for life, such as the purchase of an annuity that guarantees a stream of retirement income that you can’t outlive. Take the time to talk these options over with your financial advisor and decide on a strategy that works best for you.

The material is for informational purposes only and should not be regarded as a recommendation or an offer to buy or sell any product or service to which this information may relate. Certain products and services may not be available to all entities or persons.

Please note that investing involves risk, and past performance is not indicative of future results.

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© 2014 and prior years, Teachers Insurance and Annuity Association - College Retirement Equities Fund (TIAA-CREF), New York, NY 10017