Planning for Retirement 101
Saving for retirement always sounds like a good idea in theory, but it isn’t always easy to practice. The majority of Americans between the ages of 40 and 60 have less than $100,000 saved for retirement, according to a TD Ameritrade survey. Nearly 60% of people in the same survey said they believe $1 million will last them through retirement.
But if most workers who aren’t that far away from retirement have just $100,000 saved, they’re not going to achieve that $1 million goal by the time they reach 65 or even 75 years of age – even with aggressive contributions and investments. Which means they’ll need to continue working well into retirement to avoid running out of money.
If you want to downshift and give yourself a traditional retirement, rather than working until you die, you’ll need to take some steps right now. Here’s how to start retirement planning or get back on track.
Start Saving Early
Whether you’re starting a job fresh out of college or you’ve been in the workforce a few years, see what retirement plans your employer offers. Look for options like a:
Sign up for your retirement plan as soon as you’re able to. The sooner you start taking advantage of this benefit, the more you’ll start to save. Let’s look at some examples to illustrate the impact starting early will have on your compounded growth. Let’s say you start saving at age 25 by putting $100 a month into a retirement account and expect an 8% annual return, you’ll have $310,867.82 by age 65. Now let’s say you don’t start saving until you’re a little bit older at age 40. At this point you’re late in the game and you will need to catch up by investing $300 a month instead of $100. Even after investing well over double of what you would’ve been investing at age 25, you will only be at around $263,181.38 by age 65. All other factors are the same, except you’re missing the compounded growth that you can only get with time. The biggest mistake you can make when planning for retirement is waiting too long to start saving.
Find the Right Retirement Account
Your job might offer one or a few different retirement accounts or might not offer one at all.
If your employer doesn’t offer a work-sponsored retirement account, open an individual retirement account (IRA). These are a good option, whether your job offers a retirement plan or not, but they are the best solution if you don’t have any other vehicle for retirement savings.
The main difference between a Roth and a traditional retirement plan is when you get taxed (now versus later). The main difference between an IRA and a 401(k) is how much you can contribute to your plan and if the account is sponsored by your employer. For instance, IRA contributions are capped at $6,000 per year in 2020. You can have multiple IRAs, but you can only contribute the maximum amount across all your accounts. If you have a 401(k), your max contribution for 2020 is capped at $19,500.
Know Your Retirement Goal
Your expenses during retirement might not be the same as they are when you’re working. You will probably need somewhere between 70% and 90% of your current income to cover yourself in retirement.
That could change depending on many factors. For instance, you could reduce your home payments if you downgrade from a large house to a smaller condo. If your household has multiple cars, you could sell one and ditch the extra car payment and insurance costs.
It’s a good idea to plan now for what you need later. If you’d like to maintain your current living standards, try to make sure you’re contributing enough to cover those costs later in life. If you think you won’t have as many expenses in retirement, you will still need to save, but you can adjust your goals accordingly.
Don’t Forget About Social Security
Social Security is a monthly payout that essentially gives you a paycheck based on your pre-retirement earnings. The average Social Security benefit is $1,503 per month. If this is enough for you to live off, you may consider not saving as much for retirement. However, that’s the current payout. It could be much lower by the time you enter retirement. Social Security is only one portion of your retirement income. It’s important not to rely solely on this income source during retirement. Instead, save as if you don’t expect it. That way it’s an added bonus if you do get a Social Security payout later.
Make Your Retirement a Priority
With so many aspects of your life demanding your money, it’s easy to push retirement further down the list. After all, if you’re not close to retirement in terms of age, it’s probably not on the top of your mind.
But retirement planning needs to be on your must-do list. Even a little savings can go a long way, as I illustrated for you in the example earlier. Continue to pay down your student loans or other debt whenever you can but find a way to make contributions to your retirement accounts before it’s too late.
To avoid forgetting about your retirement savings, consider setting up recurring auto-contributions. This might come directly from your paycheck if you have a work-sponsored retirement account. If you have an IRA, you can set up auto-pay to add funds from your bank account to your retirement account every month. If you don’t want to commit to auto- contributions, consider adding a monthly calendar reminder to do this instead.
Legacy Financial Group is committed to educating and empowering consumers to make wise financial decisions. Click Here to contact us about putting together a comprehensive financial plan.
For more information on retirement planning, click here.