Retirement Planning: What You Can and Can’t Control

Investing, Retirement Planning
Retirement Planning: What You Can and Can’t Control

By Michael Chamberlain

Learn more about Michael on NerdWallet’s Ask an Advisor

There are so many articles and books about retirement that it would take practically your entire retirement to read them all. However, there are really just eight primary factors that determine your chances of retirement success. And of these key drivers, only half are fully within your control.

What’s beyond your control

You should understand these factors, but don’t spend too much time worrying about them because at some point, there is simply nothing you can do.

1. How long you will live

People often ask how much they can afford to spend each year in retirement. There’s no easy answer because no one knows precisely how long anyone will live. If you knew you would only live another year, you could spend it all. But thankfully, most individuals will have a long retirement. The average man retiring today at age 65 could expect to spend almost 18 years in retirement, while a woman would spend about 20 years, according to life expectancy estimates from the Social Security Administration. Even with those estimates, though, you can’t know how long you’ll live. Since longevity is a major unknown and you do not want to outlive your money, it’s smart to plan to have enough to live well into your 90s, around 30 years in retirement for most people.

2. Your health

Experts recommend that you watch your diet and remain physically and mentally active during your retirement years. But there are major aspects of your health that are beyond your control. Some people will require long-term care, either at home or in a facility. This obviously affects the quality of your retirement and can also be a huge financial drain.

3. Rate of inflation

Currently, inflation doesn’t appear to be a major issue. But if you had retired 20 or 30 years ago, when prices were rising four to five times faster than an individual’s retirement income, you might have been in big trouble. Rapidly rising prices can shrink your nest egg much faster than expected, perhaps forcing you to cut back on spending or even go back to work. Regardless, inflation is out of your control.

4. Market volatility

Considering the impressive equity returns between March 2009 and this summer, it was easy to think the market always goes up. The events of the past few weeks have emphatically demonstrated otherwise. But no matter how much you worry about these fluctuations over time, there is nothing that you can do to prevent them. As long as you have a plan to ensure that your investments have the proper level of risk and that you are well diversified, that’s all you can do.

What’s within your control

1. How much you spend

The primary reason people don’t save enough is that they needlessly spend too much. When you think of the latest car, a newly remodeled kitchen or a designer purse as a necessity rather than an expense, savings will suffer. Money spent can’t be saved. To enjoy a successful retirement, you have to balance your current needs and wants with your future needs and wants.

2. How much you save

Some people are born savers, some are not. For savers, part of every paycheck goes into savings. For others, it’s much harder. But with fewer people getting pensions and concerns about the long-term health of Social Security, there is no way you can have a successful retirement without putting something away for the future. Even if you aren’t a natural saver, this is an important aspect of retirement planning that you can and should control.

3. Having — and sticking to — a financial plan

A lot of people struggle with how much to save and how to invest their savings with the appropriate amount of risk. Individuals who seek advice from a financial planner tend to have greater confidence in their financial decisions. They also have a higher probability of achieving their retirement objectives. Of course, not all financial planners are the same. Look for one who is not only a Certified Financial Planner but also gets paid on a fee-only basis. A fee-only financial planner does not sell investments or earn commissions

4. How you are invested

You need to determine the answers to the following questions:

  • How much risk is in your portfolio?
  • Is this level of risk appropriate for your circumstances?
  • Is your portfolio tax efficient?
  • Are your current investments suitable for your portfolio?
  • Do you rebalance your portfolio periodically?

Of all the things to consider regarding retirement, you should understand that many critical factors are not up to you. So don’t fret too much about those. Instead, focus on the things you can control: You can track your spending and determine how much you can save and how you should be invested. And you can have and follow a comprehensive financial plan. Concentrating on these four areas will give you the best chances for a successful retirement.


Image via iStock. 

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