Retirement Planning: How to build good financial habits

Enjoying a long, healthy life is something we all desire. To do so, you’ll need a healthy supply of money to go the distance with you. The likelihood that you will outlive your money is known as “longevity risk.” Begin early and follow these good financial habits, and you’ll be on your way to helping increase the likelihood that your retirement savings will last as long as you will.

Set clear goals—Think about your short-term and long-term goals and create a financial plan to reach each one. You don’t need a long or formal statement, just a written plan of action. Try to stick with the plan, even though it may be a rocky ride at times.

Pay off debt – Maintain a healthy balance sheet and a clean bill of financial health. If you accumulate debt, especially high-interest rate credit card debt, pay it off as soon as you can.

Live within your means – Pay off all monthly bills. Buy only what you can afford now. One effective approach is to track all your spending for a month, evaluate which expenses are truly necessary, and then cut out what isn’t needed.

Save diligently, invest wisely – Build long-term financial resources for retirement through regular savings. Start today and you can begin to put the power of compounding on your side. It’s more important to plan for longevity risk and inflation risk (having your purchasing power erode over time) than to worry about short-term market movements.

Grow your net worth – Make it your top priority to save for your retirement throughout your working years. Over time, your net worth—your assets minus your liabilities––will grow as you save more and pay off debt, particularly large obligations such as a mortgage. Review your net worth each year and track your progress.

Monitor your asset allocation – Set and maintain an appropriate mix of investments throughout your life. Your needs, goals and risk tolerance may shift gradually as you age, but you will always benefit from broad diversification.

Conduct an annual financial check-up – Review your overall financial well-being with a particular focus on your investments. Evaluate how well they perform compared with similar investments. And review your asset allocation, rebalancing it as needed.

Protect your family – Keeping your will up-to-date (you do have a will, right?) and arranging for life, health and disability insurance will help protect your loved ones should something happen to you.

Withdraw safely – To give your money a good chance of lasting as long as you will, withdraw it at a “safe” rate. Limit annual withdrawals to 4%-5% of your initial retirement account balance when you retire. Then adjust for the rate of inflation. This will give your nest egg a better chance of lasting 30 years or longer.

Protect against long-term care costs – Being ill for a long period can create a tremendous financial burden. With health care costs tending to rise faster than overall inflation, it may be worthwhile to investigate long-term care insurance. It can protect your assets and spare your loved ones from having to be your full-time caregivers.

Annuitize some money – To create a lifetime stream of income, you might consider purchasing a fixed annuity with some of your savings. Calculate your fixed monthly costs. Subtract your Social Security benefits. Then, purchase an annuity to cover the difference. Use the rest of your savings to pay for more discretionary and variable items.