Throughout our lifetime we work hard. We know the endgame is living the retirement of our dreams. Yet when we begin our professional careers sometime in our 20’s, it can be hard to see that far out or have a sense of urgency about saving. Retirement is 40 or more years away; there’s plenty of time to prepare, right?
The truth is that to make that retirement dream a reality, early planning and steadfast financial management are essential.
Considerations Before Retirement
The years pass quickly and retirement sneaks up on us. We need to be ready to turn and face it. Yet, for whatever reason, half of the households age 55 or older are not ready. Plus, the retirement landscape has changed throughout the years, which means that our decisions have greater impact than ever before. Why?
1. Social Security is not the answer.
Our Social Security system is at risk since the number of people paying into the system is much smaller than those receiving benefits. Even if it were a guarantee, Social Security is only expected to replace 30–40 percent of our retirement income.
2. People are living longer.
According to the Social Security Administration, we can plan on the probability of living 30-plus years in retirement, which means we need our retirement savings to be significant enough to last longer.
3. Older Americans experience a higher degree of inflation.
Retirees are significant users of healthcare, which increases, on average, at a rate much greater than the average rate of inflation.
4. The responsibility to save is up to us.
Pensions used to be the key source of income for most Americans, but they are few and far between today. Now, we are in the driver’s seat of our own retirement, though vehicles like 401(k)s help.
How much do you need in retirement?
Most retirement planners agree that you will need at least 70 to 85 percent of your current annual household income in retirement. To get there, it’s estimated we need eight to 10 times our ending salary to be financially secure by age 67. There are checkpoints along the way (see below).
Retirement Tips – How can you get there?
There are a number of ways people can boost their retirement savings—no matter what their age. Here are 8 retirement tips:
1. Contribute as soon as you are able.
When we contribute matters as much, if not more, than how much we contribute. For example, if someone contributes $100 per month from age 22 to 65 and earns an 8 percent return on their investments, they would have $412,436 at retirement. Waiting just five years to start contributing means having $137,000 less at retirement.
2. Contribute as much as possible.
Experts agree that we should contribute between 10 to 15 percent of our salaries to a retirement savings vehicle. Some experts even say 20 per-cent. The idea is to start wherever you can and work your way up.
3. Maximize the company match.
If your company offers a match, contribute at least the minimum amount needed to get the full company match.
4. Increase your deferrals annually.
Pump up your contribution rate each year by increasing it by one to two percent. The best time to do so is when you get a wage increase or pay off a loan. That way, you won’t feel the impact on your pocketbook as much.
5. “Catch up” if necessary.
In 2017, the government allows people under age 50 to contribute 100 percent of their salary up to $18,000 to their 401(k)s. Those age 50 and older are able to contribute 100 percent of their salary up to $24,000.
6. Consider Roth 401(k) contributions.
Roth 401(k)s allow you to pay taxes on your contributions up front and then collect everything you contributed and everything it grew into as tax-free upon retirement. You also have the option to do a pre-tax or traditional 401(k), which gives you a tax break as you contribute, but all dollars you withdraw at retirement are taxable. Remember, if your company offers a match or profit-sharing contributions, those monies will always be in a pre-tax 401(k).
7. Take the appropriate investment risk.
If we are invested appropriately and for the long haul, we can expect to achieve an eight to 10 percent return on our investment over time.
8. Let it go to let it grow.
Above all, we want to remain faithful to our investments. It seems counterintuitive to think about leaving our money in investments that are declining, but the truth is that we are better off financially in doing so.
Walk In Step with Retirement
Keep your eyes on our retirement, as early in your career as possible. Walk side-by-side with it, pay attention to it, and nurture it. One day, you’ll find it returning the favor. We can help you start mapping out your retirement plan.