Planning for retirement early

Did you know that the average senior needs $828,000 to retire? And that doesn’t take into consideration living in more expensive areas, cost of living adjustments (COLAs), or income from social security. In fact, the average retiree probably needs more than $1 million in savings to have any real security. That may seem like a lot of money, but with the right financial planning—more specifically, the right retirement planning—you can start saving now and have enough to retire on when the time comes.

How Much Do You Really Need to Retire?

The sooner you begin retirement planning, the better. You want to start building your nest egg as soon as possible so it can start to grow. Savings accounts, money market accounts, CDs, and other interest-bearing financial tools can help build your wealth, but even with compound interest, it’s a slow process. If you start with $1,000 and add $200 per month to a savings account that pays 0.09 percent interest, in 40 years you will have $98,740.81—one-tenth of what you need to retire comfortably. You can adjust the numbers and save more as you earn more, and you can look for accounts that pay higher interest rates, but a savings account alone won’t generate enough money for your retirement needs.

Many people dream of living off the dividends from smart investments by the time they reach retirement age. However, few people achieve that goal. Dividends are paid to shareholders by companies as they grow. You can receive your dividend as a check or you can roll it back into the company to increase your investment. However, you need to invest a lot of money to see any substantial dividend yield. And, of course, any investment has risk; there is no way to be sure you will continue to earn dividends and won’t lose money.

Here is an example compiled by the Wall Street Journal. Let’s assume you retire with $1 million and want $40,000 per year to live on (adjusted for inflation). So you invest $400,000 in Treasury bonds and $600,000 in stocks, resulting in a 3 percent yield, or $18,000 per year. To reach $40,000, you sell off some bonds each year. After 21 years, the money would be gone. Today, the average American life expectancy is 78.7 years, so that might be enough—or you may live longer, in which case it won’t be sufficient. That’s why you need to start retirement planning now.


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Millennials Aren’t Saving Enough

Unfortunately, people tend to neglect financial planning and underestimate what they will need to retire. Most millennials, for example, plan to retire by age 60, but most of them aren’t on track to retire in their 60s. The most recent polls from Fidelity Investments show that millennials currently have an average balance of $25,500 in their 401(k) retirement plans. The same polls show that they are committing about 7.3 percent of their paychecks to 401(k)s and their employers are matching at an average of 4.1 percent. That means they are saving 11.3 percent of their earnings in their 401(k)s. Fidelity estimates that you need to save 15 percent or more of your paycheck to have enough to retire.

That assumes, of course, that you are saving at all. According to research by the National Institute of Retirement Security, 95 percent of millennials have inadequate retirement savings, including 66 percent who are not saving at all. It’s not that they aren’t making good salaries; it’s just that they don’t see retirement planning as a priority.


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Retirement Planning Starts Now

The sooner you start including retirement savings as part of your financial planning, the better off you will be when it comes time to retire. You should start now! If you wait because you assume you will be making more money or your lifestyle will change, you will only have to try to make up for lost time. If you choose to make retirement savings a priority, you will be ahead of most Americans.

Here are some steps to consider to help you start reaching your retirement savings target:

  • Maximize your 401(k) – Even if your employer doesn’t offer matching funds, a 401(k) is still one of the best ways to save for retirement. The advantage of contributing to a 401(k) is you are contributing tax-deferred income. This means you are only taxed on the income you have left after contributing to your retirement account and don’t have to pay tax on your 401(k) contributions until after you retire. In other words, adding to your 401(k) reduces your current taxable income so you will pay less in taxes.
  • Supplement with an IRA – An individual retirement account (IRA) is a good way to add to your 401(k) savings. There are several types of IRAs. The traditional IRA works like a 401(k) and allows you to save tax-deductible money; you pay the taxes when you withdraw it. There also are Roth IRAs, which are taxed when you contribute, but tax-free when you make qualified withdrawals or distributions. There are also self-employment pension (SEP) plans and other types of retirement accounts. Consult a financial advisor to determine the best options for your financial strategy.
  • Use low-risk savings accounts – As part of your retirement plan, you should consider savings accounts, money market accounts, CDs, and other savings vehicles. Money accumulated in savings can be transferred into an IRA later or used for other retirement investments. Many banks offer services that automatically transfer money into your savings account to help you build your nest egg.
  • Consider more aggressive investments – If your retirement is still some time off in the future, consider investing in stocks and bonds. Mutual funds and other investment products are more volatile and less secure (unlike bank accounts, they are not insured by the U.S. government). However, they also tend to yield substantially higher returns over time.
  • Consider real estate as an investment – Property values tend to increase, so investing in property or even a home will give you an asset that will appreciate. When the time comes to retire, you can consider options as to how best to use the equity in your property.

As Miguel de Cervantes once wrote, “To be prepared is half the victory.” If you start preparing now, you will be ready when you decide to retire. Your first step should be to contact a financial advisor at your local First State Community Bank to discuss retirement planning and develop a savings strategy.

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