Control what you can when planning for retirement
Planning for retirement can be overwhelming. Volatile financial markets, media headlines and investment return uncertainty can cause a feeling of uneasiness about the future.
While this feeling won't go away anytime soon, it can be managed with the right approach and perspective.
To help accomplish this, the first and most important step is to create a financial plan that you can use as a road map to navigate through the good times and bad. The second step, which I'll discuss today, is to separate the things you can control from those you can't. Doing so will help you focus on the variables of your financial plan that you have power over, which will ultimately improve your chances of long-term success. Let's take a look at some of the big ones:
Within your control
• Spending: It's not about what you make but what you keep, with expenses being a key component. Monitoring your spending and creating a budget can be a pain, but doing so raises self-awareness on where your money actually goes each month. Setting aside one hour every month to review your expenses will go a long way.
• Savings: In addition to 401(k) or employer plan contributions, consistent savings in your personal accounts is important. Use the surplus between your take-home pay and living expenses and implement a consistent, disciplined savings plan. After building an adequate “emergency” fund, consider automating contributions from your checking account to an investment account each month.
• Asset allocation: Develop a mix of stocks and bonds that is consistent with your risk tolerance and investment time horizon. The right asset allocation can put you in position to capture upside in bull markets while providing downside protection during market corrections.
Out of your control
• Market Returns: Will the stock market yield 6 percent this year? 4 percent? 8 percent? How about the next decade and beyond? No one knows for sure. That's why developing a diverse allocation across several asset classes is so important.
• Policy, laws and regulations: Fiscal policy (driven by Congress) and monetary policy (driven by the Federal Reserve) are controlled by higher powers. From changes in the tax rates on your Form 1040 to the amount you're allowed to contribute to an Individual Retirement Account (IRA), your after-tax income and the rules governing your retirement benefits will change over time. Because of this, diversifying your assets across taxable, tax-deferred, and tax-free investment accounts is a good idea.
Somewhere in the middle
• Income: Increases in salary and other sources of income tend to correlate with personal ambition, skill, and hard work. However, limitations can arise depending on your career path and circumstances.
• Lifespan: Exercise and nutrition can play a significant role in how long you live, but so do uncontrollable factors like family genetics and unforeseen events. Your money needs to last throughout your lifetime, however long that may be.
There's a lot of uncertainty out there. Cut through the noise and focus on controlling what you can control.
• Jim Platania Jr. is a financial adviser with Arlington Heights-based Platania Financial Inc., offering advisory services and securities through Cetera Advisor Networks LLC, member FINRA/SIPC. He is a certified financial planner and can be reached at (847) 870-7526. Cetera is not affiliated with Platania Financial.