Though retirement is a top concern for many Americans, most need help understanding financial jargon and implementing simple habits that will increase their long-term savings.
A practical and measurable approach to retirement can help people approach the daunting task of saving enough to support themselves during their golden years.
Related: How average Americans can better plan for 401(k), retirement income
In a recent interview with TheStreet, Bob Powell unpacks a few minor changes consumers can make in the here and now to set them up for a comfortable retirement. Beyond ensuring you’re consistently putting money toward a retirement plan, Powell recommends mapping out the specifics of how much you’ll need overall and siphoning that total into necessities such as housing, transportation, and insurance.
Mapping out your retirement plan: Identify income sources 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 savings nest egg is only half the battle. Delineating expenses and sources of income will help retirees understand how much they will realistically need in the long run while staying conscious of their spending.
“One, make sure you're saving, but also know what you're saving for," Powell said. "It's one thing to have a pile of money. It's another to calculate your expenses in retirement."
“How much do I need to accumulate to fund 30 years of housing? It's 30 years of transportation expenses, 30 years of insurance, and 30 years of taxes," he continued. "Where's that money going to come from? Will it come from a 401(k) from a Roth IRA? Will it come from Social Security? Am I lucky enough to have a defined benefit plan? And so you need to really think about what you have and how that money will be spent.”
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Another key component of effective planning is factoring in risks impacting total savings and quality of life, such as inflation.
“I think about retirement as all the risks you'll face," Powell said. "I think people not only need to think about what expenses they'll face in retirement but also how they will manage and mitigate all these different risks, and the tools that they'll use to manage and mitigate some of these risks will be different.”
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“So I mentioned inflation risk," he added. "You might want to ensure you're investing in stocks to keep pace with inflation so that you won'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 that you'll face."
Investing in stocks doesn't always manage and mitigate that risk. Still, annuities — income annuities and tax-deferred income annuities — are tools that you could use to manage the risk of outliving your assets or the risk of longevity.
Powell notes that outliving your savings, negative market returns, death of a spouse, and a change in housing needs are all unexpected challenges that should be factored into a retirement plan.
Related: How to maximize Social Security survivor benefits in retirement
How young savers can fight present bias
Powell delves deeper into present bias, an affliction that tends to affect younger generations more, but everyone experiences. Looking at your life holistically instead of just the present moment can help savers build toward the future they envision.
“One of the things that’s become very popular to talk about in the financial planning profession these days is what behavioral biases people have as they think about saving for investing in retirement," Powell explained. "One of the terms that is probably unknown to many people is something called present bias, which refers to the tendency of people to give stronger weight to payoffs that are closer in the present time when considering the trade-offs between two future payments.”
Powell notes that finding the right balance between enjoying your present-day life while living within your means will help your future self live comfortably.
“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 for tomorrow. I care about today, and I care about the money 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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