By Teresa Hassara, Executive Vice President and President, Institutional Retirement, TIAA-CREF
Imagination is a wonderful thing. It inspires our dreams, but it can also create anxiety that can make those dreams seem out of reach. When it comes to our visions of retirement, how can we feel more certain about our financial futures?
I’ve spoken with hundreds of women at all stages of their careers who worry about their ability to live the life they want in retirement. Here’s one story I heard recently. Sandy, a successful professional in her late 30’s, had watched her parents struggle financially throughout their lives. Her mother only recently stopped working at the age of 78. With that as her frame of reference, Sandy was convinced she would never be able to retire, even though she and her husband were careful about their spending and saving. Fortunately, Sandy decided to meet with a TIAA-CREF financial advisor to see if retirement was really out of reach.
In that meeting, Sandy and her husband discussed their current and future financial picture. The advisor helped them calculate their income replacement ratio (using an advice methodology from Ibbotson Associates)—a metric that measures what the couple will need to enjoy their retirement. It also helped them understand what income streams (such as pensions, annuities and Social Security) they will have to replace their paycheck and cover their expenses after they stop working.
Sandy learned that she is in much better financial shape than she ever imagined. In fact, she is on track to retire at 65 or earlier. Sandy, who described the meeting as “eye opening” and “life changing,” is a great example of someone who found a way to conquer her anxiety by taking action.
Her experience shows that the best way to break through anxiety about your financial future is to face your fears head-on. Here are three steps to consider taking to become more financially confident:
1. Know where you stand. Work with a financial advisor to understand what you will need when you retire, so you can begin planning and saving now. Sandy learned that you need to look beyond how much you are accumulating during your working years. A more effective approach is to calculate how much income you will need to cover your expenses in retirement. Then look at what income streams you have planned to cover those expenses.
The income replacement ratio used by TIAA-CREF specifically measures the amount of after-tax income a person expects to have coming in when they retire, divided by his or her after-tax salary before retirement. Generally, experts recommend a ratio between 70 and 100 percent (often at a minimum, given high expenses at the onset of retirement for some) of an individual’s salary during his or her last year of work. Knowing your ratio is just as important as knowing your credit score, because it gives you a clear window into how retirement ready you are.
2. Build a plan. Once you and your advisor have calculated your income replacement ratio, you can work together to build out or modify your financial strategy and find ways to potentially boost your number. This may mean increasing how much you’re saving for retirement each paycheck; pushing back your expected retirement date; or creating additional income streams through annuities, which are the only financial vehicles that offer guaranteed income for life (subject to the issuing insurance company’s claims-paying ability.)
3. Check your plan regularly. Make sure you review your plan, and how well you’re meeting your savings goals, on a regular basis. Set aside time at least once a year and be sure to check in with your advisor to review your progress.
As Sandy’s story demonstrates, bringing your financial picture into focus is the first step in helping you realize your dreams for retirement. Yet we’ve found in a recent survey that less than a third of women have “done the math” and calculated how much money they will need to live comfortably in retirement. Make sure you’re not one of them. Take the time to get the facts and build a clear financial roadmap that will keep you on track. And tell your friends and sisters and nieces and mentees to do the same. Together, we can help women build their retirement readiness. Because like Sandy, don’t we all want to actually live that great vision we imagine for life in retirement?
Teresa Hassara will be speaking on the panel “Motivating and Influencing Others to Impact Social Good” at the 2015 Massachusetts Conference for Women.