Five Steps to a Financially Secure Retirement

Last month, feeling cranky, I unleashed on the dumb money moves people make. Instead of suggesting positive steps to take, I highlighted some of the worst things you can do with your money and why they should be avoided. Glad to get that out of my system.

Now, I'm back to my usual cheerful self and ready to offer up some positive suggestions for the ultimate financial goal -- retirement. Even though it takes decades to reach, retirement has a way of sneaking up on folks. It can be here before you know it -- and before you're ready.

That's why I'd like to suggest five steps you can take to make for a more financially secure retirement. I'm sure you've heard much of this before, but there are some things you can't repeat often enough.

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1. Pick a date: This is the date each year when you're going to increase your contribution to a 401(k) or some other retirement savings plan. It could be any day at all: your birthday, wedding anniversary or favorite holiday. Another logical choice is when you expect an annual pay raise.

It doesn't matter. All that matters is that at least once a year you bump up your retirement savings rate by a small amount. The typical recommendation is to increase your savings rate by 1 percent of your gross pay each year. If you're the aggressive type, make it 2 percentage points each year.

Doing it this way should make the reduction in take-home pay barely noticeable; yet at the same time give a nice boost to your retirement savings.

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Imagine you make $50,000 a year now and contribute 5 percent of that amount to your 401(k) plan at work. Following the 1-percentage-point-a-year strategy, you will boost your contribution from $2,500 a year to more than $5,000 within five years, assuming you receive pay raises along the way. Within 10 years, you would be contributing more than $7,500.

Over 25 years, that extra $5,000 a year could mean an additional $316,000 in retirement savings, assuming a 7-percent annual rate of return.

2. Do the pay-off math: Calculate what it will take to ensure that you retire mortgage-free. Rather than sticking to the payment schedule provided when you took our your loan, figure out what kind of monthly payments it will take to ensure that your loan balance is $0 on the day you retire.

Suppose you just took out a $250,000, 30-year fixed-rate mortgage at 5 percent. Your monthly payment would be $1,342. But if you plan to retire in 20 years -- not 30 -- then adding an extra $308 to your monthly principal payment will ensure your home is paid off in time for retirement, and reduce your annual income needs by about $16,000.

Five Steps to a Secure Retirement

3. Please, please wait: I'm talking about Social Security here. Too many Americans begin collecting Social Security benefits as soon as they turn 62 even though they are penalized severely for not waiting until they reach their full retirement age.

Consider the case of somebody who turns 62 today and plans to begin collecting Social Security on June 1. They would see their monthly benefit reduced by 25 percent compared to what they would collect at their full retirement age of 66. That means someone eligible for a $2,000 monthly benefit at full retirement age would collect just $1,500 a month at age 62.The reduced benefit is compounded over time because your annual cost of living adjustments will be based on a smaller starting figure compared to where you could have been.

I'm certain some will argue they could receive more overall from Social Security by collecting for a longer period of time. That may be, but the truth is most retirees are living month to month, spending their Social Security allotment and not saving it.

4. Answer this question: What exactly do you mean by retirement?

Sounds silly, but it's a critical issue when preparing for retirement. For some folks, retirement means never working another day in their life.

For many others, it means leaving behind a decades-long career used to support a family and working a reduced number of hours in a more relaxed, enjoyable environment. If you fit into this category, then your chances of a financially secure retirement look much better.

Even if you earn just $15,000 a year in part-time work for the first five years of retirement, that's $75,000 less that you need to pull out of savings. Assuming a 5-percent rate of return, that $75,000 could grow to $100,000 over the five years. And with five years less of retirement to support, you will have reduced your chances of depleting your nest egg. So what do you mean by retirement?

5. Learn about the basics: As we've learned over the last decade, investing for retirement can be a stomach-churning experience. When things are going well, it seems easy. But when things are dismal, it's even easier to make costly mistakes.

That's why I think it's worth everyone's while to learn about the basics of investing. I'm not suggesting everyone can or should become an expert, but a basic understanding of investing is critical in an age when we're largely responsible for ensuring our own retirement security.

To get started, you'll want to check out "The Elements of Investing," a concise, easy-to-read book written by Charles D. Ellis and Burton G. Malkiel, two of the leading investment minds around. Their 154-page book includes a recommended reading list for those wishing to learn more.

The more you know about asset allocation, diversification, risk and reward, and why expenses matter, the better off you will be. And the more you know, the less likely you are to panic and make a bad decision during the next spell of market turbulence. This extra knowledge can only help when it comes to preparing for a financially secure retirement.

David McPherson is a Certified Financial Planner professional and founder of Four Ponds Financial Planning LLC ( in Falmouth and Mansfield, Mass. Contact McPherson at