Getting Your Retirement Planning House in Order

By Brooks Clark, CFP
Clark Financial Advisors

Reprinted from The Gadsden Times
February, 2007

Well, this is it! It is the New Year and time to begin getting your financial house in order, especially with regard to retirement planning. Last month, I pointed the spotlight on the fact that many Americans and Alabamians are in a state of denial about planning for retirement. I focused on what will happen to those who do not get serious about planning for their retirement. Not planning will leave most of us dependant on social security to generate the bulk of our retirement income; not bad, I guess, if you are ready to live on half of what you earned while you were working. That’s the bad news; as I promised at the end of last month’s column, the good news is that there are some initial practical steps that can be taken to snap yourself out of denial and into action, and I’m going to tell you how to get that action plan going.

Saying that you are going to get your financial house in order each year is a little like promising yourself that you are going to lose weight or stop smoking at the beginning of each year. By mid-January, you are eating cookies, sneaking a smoke, or salivating over that large flat screen television that you just “have to have” right now. In most cases, immediate gratification trumps getting thinner, getting healthier or getting prepared for your financial future. Well, it’s boot camp time! Get focused! Are you ready to live on half of what you earn? No? Then, let’s begin.

• Step 1—Set A Retirement Goal
  You wouldn’t start a road trip to California without a road map would you? So how can you expect to reach your retirement goal if you do not set a target and chart a direction? Setting a retirement goal involves determining how much you will need for your annual income during retirement. Remember, it should be your financial hope that your mortgage will be retired by that time and that your kids will be “out of the nest”. So be realistic, think about your retirement expectations, and determine what you will need annually in today’s dollars.
• Step 2—Determine How You’ll Reach Your Goal
  Now that you have a retirement dollar amount in mind, or at least a target, there are a number of free retirement calculators on the Web that can help you determine how much you need to begin to save to reach that goal. One of my favorite retirement calculators is T. Rowe Price’s “Retirement Planning Worksheet” located on the company’s website at www.troweprice.com. This worksheet allows you to state your desired income, then list your current assets in order to determine how much you will have available when you reach retirement. The vast majority of people who complete this exercise are shocked. Most Americans don’t know what it is going to take to reach their retirement goals, but they continue in ignorance, with illusions of grandeur about what retirement will be like. Well, wake up! Find out what plan of action you need to take by going to a website that offers a retirement calculator and take this important step and get realistic about retirement. (If you have trouble navigating a certain retirement worksheet, feel free to contact me via my email address at the bottom of this article, and I’ll be glad to assist you.)
• Step 3—Make Saving More Realistic
  Now you know what it’s going to take to reach your retirement goal and the amount you should be saving, but you feel that you can’t save money because you have bills stacked up and you are underpaid. Well, you can give up now, or you can begin to take control. The way to begin taking control is to get out of debt. Begin by listing your bills on a single piece of paper, and then list the interest rate for each bill out to the right. (I did this 25 years ago and almost fainted!)

Next, try and consolidate your debts into “fewer piles.” In other words, try to get those interest rates down to the lowest level by shopping credit cards and loan rates, and then consolidate to the lowest interest rates. After you have consolidated as many debts as possible, determine the highest interest rate debts you have left and start eliminating the highest rate loans first. Remember, even the longest journey begins with the first step. Remember the old joke, “How do you eat an elephant?” The answer is “One bite at a time!” Don’t be overwhelmed—you can do this!

Here are a couple of hints. First, cut up all but one of your credit cards. Second, operate on a cash basis so you can begin to determine how much cash you need each week. Please note that I said how much you need to spend, not how much you want spend. Third, look around your house and find the items that represent the last ten purchases you made. Are these items that you and your family absolutely needed, or are they items that you simply wanted? There is a difference, and you know it! You must begin to eliminate unnecessary purchases to reach your ultimate goal of a comfortable and enjoyable retirement. Complete this exercise of determining needs versus wants, and you will begin to find money where you did not believe money existed. Direct these new funds to paying those bills.

Next month we’ll focus on developing habits that allow you to save money “painlessly”.

Brooks Clark is a certified financial planner with Clark Financial Advisors in Birmingham, which serves clients throughout Northeast Alabama. Clark is originally from Anniston. His e-mail address is brooks@clarkfinancialadvisors.com.