You work hard to earn the lifestyle you have, so you want to make sure that hard work pays off—especially in retirement.
However, without adequate retirement planning, you may have to adjust your lifestyle to accommodate a lower income when it comes time to retire.
But it’s never too late (or too early) to start preparing for retirement. If you develop a game plan and set the right goals, you can build a substantial nest egg and live the retirement lifestyle you desire.
If you implement a successful retirement plan, you will be well ahead of most Americans. Research suggests that only 36 percent of Americans believe they are on track to reach their retirement goals, and a quarter of all Americans have no retirement savings in place.
Furthermore, Americans tend to underestimate their retirement needs. One-third of Americans polled said they would like to have between $100,000-$250,000 saved for retirement, which is a fraction of what they will actually need. In Missouri, for example, if you spend about $44,000 per year to maintain your current lifestyle, you will need $1.1 million to maintain that lifestyle in retirement. And that amount doesn’t account for dreams of a vacation home or extensive travel once you stop working.
So what should you include in retirement planning? Here are eight tips to get you started:
1. Develop a detailed retirement plan.
Putting money aside for retirement is good, but you won’t know how much you need to save without a retirement plan. Set a savings goal. You can conduct a financial assessment to estimate how much you will need.
Some of the variables you need to consider include:
- Your current income and expenses. How much do you currently earn, and how much is left over after paying your bills? How will your current income and expenses translate into retirement—particularly in terms of maintaining your standard of living?
- Emergency fund. Do you currently have an emergency fund to help you cover unexpected bills or losses of income? Even in retirement, you will need to build an emergency fund or other system to address unforeseen bills and financial needs without disrupting your savings.
- Other savings accounts. Beyond an emergency fund, you may choose to put money into savings accounts that offer a modest return on interest.
- Long-term goals and obligations. For example, do you plan on paying for your child’s college education? If so, what is the maximum cost you might end up paying?
- Future medical needs. If you have existing health conditions, you need to account for them in a retirement plan. Even if you have a clean bill of health, you need to prepare for a future in which medical expenses arise.
- Existing debt, including mortgage payments, student loans, and credit cards. This debt is likely impacting your ability to save for retirement. It’s important to create a plan for repaying this debt and reducing your obligations ahead of retirement.
Once you have a comprehensive picture of your finances, you can set long-term and short-term savings goals. Be sure to revisit your retirement plan at least once per year to assess whether you’re still on track to hit your goal.
2. Estimate how much you need.
After taking a hard look at your finances to see how much you can afford to save each month, it’s important to make sure that amount will really be enough for retirement.
For years, financial planners recommended putting 10 percent of your income away when preparing for retirement. Unfortunately, 10 percent is no longer enough for many households. Today, one popular budgeting strategy is the 50/30/20 rule—setting aside 50 percent of your income for needs (such as rent, groceries, and gas), 30 percent for wants (such as entertainment, travel, and clothing), and 20 percent for savings.
This budgeting strategy is easier to manage, but it’s still important to see whether that 20 percent savings strategy will allow you to hit your retirement savings goal. As you plan for your retirement, make sure you account for the following:
Your Retirement Lifestyle
Do you plan to increase your standard of living or spend on travel? Alternatively, are you hoping to maintain your current standard of living or even spend less in retirement?
Social Security Benefits and Withdrawals
The income you earn over your working years and your age when you decide to start taking Social Security benefits will affect how much you receive each month. A financial advisor can help you understand your Social Security benefits and plan out these distributions to maximize their value.
Are you hoping to make any one-time purchases or reach a key milestone in your retirement? Do you want to travel or buy a vacation home? If so, you need to account for these factors separately from your retirement savings plan.
With inflation increasing every year, the amount of money you’re spending today is certain to increase. You need to adjust retirement income projections for inflation to ensure they will be adequate to your needs.
Changing Risk Profile for Investments
Your retirement fund investments may be earning a great return today. However, as you age, your portfolio will inevitably become more conservative, reducing your potential risk and your potential reward.
Tax-optimized retirement fund withdrawals, Social Security benefits, and other tax scenarios can greatly affect your taxes owed and your net income in any calendar year.
Consider the kind of lifestyle you want when you reach 65, determine how that fits in with your current spending and finances, and adjust for inflation. You should arrive at an accurate figure for your retirement savings needs.
3. Save early!
Many people wait to start saving, thinking they will have plenty of time once they start making more money. This is a mistake.
The truth is, no matter how old you are, you should start your retirement planning now! Even if you are just starting out in the workforce, you may have more disposable income in your twenties than you will later in life.
The benefits of saving for retirement early can add up quickly when those contributions deliver annual returns that grow their value. As your income increases in those early years of your career, one easy way to grow your savings contributions is to dedicate those pay increases to your savings goals.
By maintaining your standard of living even as your income rises, you can give your savings a valuable boost.
Our lifestyles often surpass our income. If you start now and make saving a habit and a priority, it will be much easier to continue growing your nest egg as you progress in your career.
4. Take advantage of 401(k) plans.
If your employer offers a 401(k) or retirement savings plan, use it to put tax-deferred money aside for retirement, even if your company doesn’t contribute. A 401(k) will lower your tax bill because it sets aside money before taxes and earns interest over time.
You should also find out if your employer offers 401(k) matching benefits. Matching amounts are typically offered as a percentage of your income, and they represent free money that goes into your retirement account on top of your salary and contributions.
If your employer offers a 401(k) matching benefit, do everything you can to earn the full match every year and maximize the total contribution you enjoy.
If you change jobs or leave your company, roll your 401(k) into another tax-deferred retirement savings product, such as a rollover individual retirement account (IRA).
5. Look into IRAs.
IRAs are a great tool for retirement savings, and they come in different types. A traditional IRA is a tax-deferred savings plan that doesn’t tax the money until it is withdrawn. A Roth IRA is a retirement savings plan that requires you to pay the taxes when you contribute to the account, so it is tax-free when you are ready to use it.
There also are SIMPLE (Savings Incentive Match Plan for Employees) IRAs for small employers and SEP (Simplified Employee Pension) IRAs for the self-employed. Check with your employer about your eligibility for a retirement savings account. Automatically transferring a percentage of your paycheck to a retirement account with each pay period is one way to help you stick to your savings plan.
Alternatively, you can consult with an accountant or financial planner to see which IRAs you may qualify for and in what amounts. IRAs can also be beneficial when seeking to manage your tax obligations to reduce either your short-term tax payments or your taxes owed in retirement.
6. Diversify your investments.
As you grow your net worth, seek out a diversified investment portfolio that balances your money across high-yield savings accounts, stocks, retirement funds, real estate, and other options that provide long-term growth and manage your risk.
A qualified broker or retirement planner can help you build your nest egg faster. But remember that there is greater risk in investments—you don’t always come out ahead—and make sure you are clear on how your broker works, particularly when it comes to commissions and fees.
7. Automate your savings plan.
Savings discipline is a challenge for everyone. You have a plan, and you know how much you want to put away each month, but unexpected expenses can get in the way.
Most banks have automated savings programs that transfer a specified amount at set intervals from your checking account to a savings or money market account. Take advantage of this easy way to save.
8. Talk to your financial advisor.
Your banker can help you set up savings accounts, money-market accounts, IRAs, or other retirement-related accounts. Many banks also have investment advisors who specialize in helping you achieve your financial goals.
Financial planners can also track your progress, help you understand how recessions and setbacks will affect your future, and adjust your plans as your financial goals or opportunities change over time.
Successful retirement planning requires smart savings and investment strategies starting now! Looking for advice about your specific goals? Our team of trusted experts is here to help you plan for a comfortable retirement.