Plan your way to a secure retirement

As a financial adviser, the question I hear most often from clients, prospects and friends is “How do I know if I have enough for retirement?” There’s no single figure that’s right for everyone. However, the basic formula for arriving at that elusive figure is surprisingly constant. The CFA Institute, the organization that offers the Chartered Financial Analyst designation, recently published a paper titled “Essentials of a More Secure Retirement” in which they sum up those steps.

Make yourself save

The most basic thing that everyone needs to do is spend less than they earn. Living within your means may sound simple, but for many it’s a constant struggle that impedes their ability to build a retirement savings.

A general guideline is to spend 50 percent of your earnings on necessities, spend 30 percent on enjoying the present and save 20 percent for the future. One of the best ways to start saving is to open a savings account and begin making regular deposits into it. Think of it as paying yourself before anyone else. Even small, consistent amounts add up over time. Consider having a portion of your paycheck automatically transferred to it each pay period — it’s like a forced saving plan that, over time, you won’t even miss. When you’ve amassed enough for emergencies and then some, it’s time to invest the money (see below).

Another way to save for retirement is to enroll in your employer’s retirement plan. If your employer offers a match on contributions to their 401(k) plan, be sure to contribute enough to receive those free dollars! If you are a full-time stay-at-home parent, look into a spousal IRA.

Maintain a constant lifestyle

The key to long-term financial success is sticking to a plan. Many investors think that financial success comes with conviction or intuition, but what really matters is discipline. Remember, it’s never too late to start, and you can get help. If you’re having trouble figuring out how to save, a trusted financial adviser can help you develop a plan (if the word “budget” strikes fear in your heart, use the word “plan”).

Strive to increase the amount you save each year. Consider saving 50 percent of your pay raises. If you keep your lifestyle constant over time, your pay raises accrue to your retirement, not your expenses. Constantly avoid debt. With the exception of homes, cars and education, using debt to buy things is almost always a bad investment.

Invest wisely

Focus on the long term. Short-term investment performance is going to always be up and down. Instead of focusing on and fretting over this quarter’s performance, remember the end goal — your retirement — and be sure to periodically review your portfolio with your financial adviser to make sure you are on track.

Diversify your portfolio. Diversification means spreading your investment across many different securities, reducing your overall risk, because some companies, industries and sectors are less successful at times while others are more successful. The mix of stocks versus bonds in your portfolio depends on several things, such as your age and target retirement date, as well as your ability and willingness to tolerate risk (the ups and downs of the market).

Think about insurance. Besides life and health insurance, you should also review disability, long-term care and liability insurance with a qualified adviser who can help you determine your needs.

Retire well

The fourth step is actually no step at all — it’s a result. Commit yourself to the appropriate discipline and strategy through your earning/saving years with the three steps above, and your retirement years should be leisurely, comfortable and secure. The best rewards are the ones you earn, and in the case of retirement, earning it is the only way. Other than a big lottery win (whose odds are statistically laughable and should never be considered a retirement plan), no one ever lucked into a good retirement.

Phoebe Venable, chartered financial analyst, is president and COO of CapWealth Advisors LLC.