What’s Your Financial Personality?
Understanding it could help your retirement nest egg grow
More than 90 percent of people aged 44 to 75 feel the United States is facing a retirement crisis, yet most have a limited understanding of how much money they’ll need and fear they’ll outlive their income, according to a 2010 survey from Allianz Life Insurance Company of North America (Allianz Life).
The study, “Reclaiming the Future: Challenging Retirement
Income Perceptions,” found that although 61 percent of these people fear outliving their money in retirement more than death, nearly one third (31 percent) say they are not too clear about what their expenses will be in retirement, and 36 percent have no idea if their income will last.
“These results are troubling not only because people are fearful about retirement income, but also because of how little they know about how much money they’ll need,” said Gary C. Bhojwani, president and CEO of Allianz Life. “We hope that this study will shed some light on the issue and inspire Americans to take control of their retirement planning today.”
Your Financial Personality
Nearly half (47.2 percent) of baby boomers aged 56 to 62 could be at risk of not having sufficient retirement income to pay for basic retirement expenditures as well as uninsured health care costs, according to the Employee Benefit Research Institute.
Understanding your financial personality can help you take the appropriate steps to start building a better financial future.
—Tends to be in financial survival mode.
—Has high credit card debt and meager assets.
—Feels unprepared for retirement.
The overwhelmed personality is unsure when — or if — they’ll be able to retire. And when they do, they expect to significantly reduce their living expenses and possibly to continue working.
What to do:
—Get control of spending.
Keep track of your spending during the next month — everything from rent or mortgage to your morning coffee at the café down the street. Looking at those expenses will show you how extra spending begins to add up. A $5 lunch every weekday can cost you nearly $1,300 over the course of a year. That $1,300 could help you get closer to your financial goals — if you stop spending it. You can find helpful expense tracking and spending worksheets at www.smartaboutmoney.org.
The National Foundation for Credit Counseling recommends paying at least double the minimum required credit card payment. High interest rates and only paying the minimum due will cause you to pay more in interest and extend the term of your debt. For example, if you have a credit card balance of $3,000, with a 17 percent APR, it will take you 126 months to pay it off, and you will pay $2,241 in interest charges alone. Calculate the true cost of paying just the minimum at www.creditcard.com.
—Strategize savings and investment.
The National Endowment for Financial Education recommends saving money in three categories — money for an emergency fund, money for short-term purchases, and money for long-term goals, such as retirement. Emergency fund and short-term spending money should be kept in a savings or money market account that is easily accessible. Long-term funds can be invested in mutual funds, stocks or bonds. Paying yourself first — putting money aside before you spend any — is one of the best ways to start a strong retirement planning program.
—Moderate income, moderate assets.
—Concerned about outliving income.
The resilient personality tends to be in their late 50s and is worried that the U.S. is entering a major economic depression. They know they need to invest for retirement, but might not have time to save enough.
What to do:
Here again, examining your spending habits can pay off. Look at what you’re spending, particularly on bigger ticket items. Having that money automatically deducted from your paycheck and put into a retirement, savings or investment account now will help you build your nest egg for the future. The American Institute of CPAs has a Benefits of Spending Less Calculator that shows you how much your budget reductions could be worth (www.360financialliteracy.org).
—Delay Social Security benefits.
If you start receiving benefits before your full retirement age, your benefits will be reduced. For example, according to the Social Security Administration, if you choose to retire at age 62, it could result in a reduction as much as 30 percent. You’ll get your largest benefits at age 70. Calculate your benefits at www.ssa.gov.
Are you contributing as much as you can to your 401(k) at work? Do you have an Individual Retirement Account (IRA)? If you are 50 or older before 2011, you can contribute up to $6,000 to your IRA account each year. Consulting with a financial planner is a good way to navigate your options and figure out a solid investment strategy. Get tips on choosing a financial planner from the Financial Planning Association at www.fpaforfinancialplanning.org.
—Has the highest income, but net worth has dropped.
—Has cut back spending, but not changed retirement or investment strategies.
—Does not have a plan for growing savings.
This group is the youngest (40s to 50s), generally counts on receiving full Social Security benefits and is relying on 401(k)s more than any other group. While they are worried that their savings won’t be adequate for the future, they are content to live for today.
What to do:
—Evaluate your retirement plans.
Do you have realistic expectations for your retirement lifestyle? It’s time to get a better handle on how much you’ll really need to retire, especially if you don’t take inflation into account. Use the Ball Park Estimate at www.choosetosave.org to see if your plans fit your budget, or if you need to adjust your plans.
Give your 401(k) a checkup. Is it growing enough? The site www.morningstar.com tracks mutual fund growth and can show you how well yours are performing. Look at all your investments and make sure they are growing. If not, it may be time for a change.
—Make changes to secure retirement income.
Living longer than expected, unforeseen health problems, job loss, more market downturns, and inflation can all drain away retirement funds before you know it. Protecting your assets and guarding against outliving them needs to be a priority. “In our study,” said Bhojwani, “the majority of respondents said that the safety of their money matters more now than it did a few years ago. The attributes people are looking for now in investments are the ability to create a stable, predictable standard of living, and the ability to provide a guaranteed income stream for life — one that won’t lose value. Without realizing it, they described an annuity-like solution.”
An annuity is a contract between you and an insurance company. In exchange for your purchase payment, the insurance company provides you income, either immediately or sometime in the future. To find out more about annuities and whether they are a good fit for you, visit www.allianzlife.com.
Whatever your age, whatever your financial personality, it’s time to give your retirement plans a checkup and take action to secure the nest egg you’ve worked so hard for.