Retirement investing: Why you need a Personal CFO
When it comes to investing for retirement—and if you don’t plan to work till the day you die, you must invest for your retirement—the big questions are how much to save and in what kind(s) of investments. Talking with your Personal CFO—or getting one if you don’t have one already!—can help you build wealth to sustain yourself during retirement.
Key ingredients for retirement investing
Answering these questions takes some thinking, planning, and projecting. Many people know to invest without knowing how or how much to invest. While employers often offer retirement plans—some even match contributions as an additional benefit of employment—this can cause people to start investing without knowing why or how to invest. Others deposit their money with an investment firm or website, trusting the firm’s brokers to handle your money for you.
Even if your employer set up your retirement investment for you, that money represents the product of your hard work and your planning. You cannot expect the investment to perform at its peak without both of those key ingredients.
Determining your retirement investing needs
You need to get intentional about your retirement investing. A Personal CFO can help you project your retirement goals, plan on how best to achieve those goals, and start you on an investing trajectory that builds wealth to sustain you and your family for life.
When it comes to investing for your retirement, you need to answer the three basic questions below. Working with your Personal CFO can help you lock down the answers.
How much do I want to live on during retirement?
Think about your current monthly budget. (You have a budget, right!? If not, talk to your Personal CFO today to make one!) We can use that information to plan your yearly money needs during retirement.
- Divide your monthly budget into things you will still need to pay for during retirement—such as food, clothes, utilities, and property taxes if you plan to keep your home—and things you hope not to need to pay for during retirement, such as any kind of debt payments or your children’s expenses (unless, of course, you plan to keep taking care of them due to extenuating circumstances). Remove the second group and total up the first.
- Think about and add to that total how much you would like to spend (per month, so rough guesses work here) on fun things you want to do in retirement, such as traveling, donating to worthy causes, gifting to children and grandchildren, or whatever else you have on your bucket list.
- Now take that amount and multiple it by 12 (for each month in the year). This gives you roughly how much you want to live on in a year during retirement (If you feel like this number is too conservative a guess, up it by a reasonable percentage, such as 10 to 20 percent).
How much do I need to invest today?
In the first part above, you determined how much you want to live on each year during retirement. Now you need to determine how much it will take to have enough invested to make that possible. Your Personal CFO can do the calculations and walk you through these steps to set your investing goal.
- Determine how long you plan to invest. You can retire whenever you want. No, really, you can, despite what your parents, employer, investment broker, or the IRS tell you. Your age has nothing to do with retirement; some manage to retire in their 30s and 40s, while others in their 80s and 90s continue to work to support themselves. Your investing and planning—not your age—determine when you retire, so decide right now how long you want to keep working or wait until you retire.
- Estimate your investment nest egg. This means to set a goal for the total value of your retirement investment at the time you plan to retire. Three variables go into calculating this number: your yearly spending during retirement, which we determined above; inflation, or the rate of how much prices increase over time; and how long you plan to invest in that nest egg, which we determined just above. Your Personal CFO should know how to put these numbers together to help you estimate the nest egg you need to cover your spending—on both necessities and bucket list items—during retirement.
- Calculate your monthly contribution. Now that you know how much you need to have saved at the time you retire, you can determine how much you need to contribute to your investment each month (or each time you get paid). This takes into consideration your nest egg goal, inflation, and the time till you retire. Again, your Personal CFO should know how to put these numbers together with you.
How should I invest?
Along with deciding how much to invest for retirement, the next big set of questions nearly everyone asks about retirement investing involves how to invest. You have options, even if you do not have an employer-sponsored investment program available, so you must understand the costs and benefits of each of these options.
Traditional versus Roth retirement investing
Deciding how to invest involves two considerations: the tax implications of your investment choice and the investment strategy (or strategies) you choose within your investment. When it comes to tax implications, you have two choices: traditional or Roth. A contribution to a traditional retirement investment takes pre-tax money (out of your gross pay on your pay stub) and invests it, whereas a contribution to a Roth retirement investment takes post-tax (out of your net or take-home pay) and invests it.
The source of the contributions—pre-tax or post-tax—matters for how the our withdrawals from the investment during retirement get taxed. With a traditional investment, none of the contributions were ever taxed, so you pay tax on all of your withdrawals during retirement. With a Roth investment, you already paid tax on your contributions, so you do not pay taxes on your withdrawals. Your Personal CFO can help you decide whether you should contribute to traditional or Roth investments based on your current and future financial needs.
Growing your nest egg
Your contributions provide the foundation for your retirement investing, but the bulk of your nest egg—assuming you start early enough—should come from aggressive but steady growth. Lots of investment strategies exist, and ultimately you need to decide for yourself what makes the most sense to you. While your Personal CFO cannot recommend specific investments, general guidelines exist on how to maximize the earnings potential of your investments.
Congratulations! You’ve set yourself up to achieve wealth and stability that can sustain your needs and goals during retirement.
Thanks for reading! If you found this post useful, please share it in your social media communities! If you would like to discuss this or any other financial matters—including taxes, retirement, financial planning, or starting and running a business—schedule a FREE consultation with JWellsCFO, your Personal CFO!