Retirement Planning Essentials

How much will I need for retirement?

It’s not easy to determine exactly how much you will need to save for retirement. But you can—and should—set a savings goal based on when you want to retire, how long you expect to be retired and how much income you think you’ll need.

First, set realistic goals that are measureable. It’s not enough to have a goal to retire early and live comfortably. What is the age you hope to retire and what does comfortable mean? Does it mean that you will travel or eat at fancy restaurants every week? These specifics will help you determine how much money you’ll need. 

You should plan on needing at least 70 percent of your current income during retirement. You could even require as much as 90 percent, so look at your expenses and determine which ones will—or could—go away. Typically when you retire, your living costs go down. You may have paid off your home. You won’t have work-related expenses such as commuting, child-care, clothing, and eating out. You may be in a lower tax bracket.

On the other hand, other costs may go up. Medical costs could increase. More spare time may be spent on hobbies, which may cost more. You may purchase that second home which carries expenses. Don’t forget to include all expenses, including taxes. Once you’ve identified your anticipated expenses, look at your sources of retirement income. Obtain your Social Security Statement from the Social Security Administration. This will provide you with a good estimate of the retirement, disability and survivor benefits that you are likely to receive based on your earnings history. You should also check this annually to make sure that your earnings history is correct.

Review your pension or other employer-sponsored retirement plans for an estimate of benefits. If you’re not participating in your employer’s plan, start today!

If your anticipated income isn’t sufficient to cover your anticipated expenses, you’ll need to start saving more to close that gap. Look at your current budget and determine where you might be able to cut back to save more for retirement. The easiest thing to do is increase the contributions to your retirement plan at work. Another option is to open an IRA.

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Making up for lost time

Maybe you didn’t start saving for retirement as early as you should have. Or maybe you’re just not contributing enough to your plan. No matter your reason is for lagging behind in the retirement savings department, the sooner you do something about it, the better.

Increase your contributions

The easiest way to ramp up your savings is to increase the amount you’re contributing to your retirement plan account. If your employer offers a match, contribute at least enough to take full advantage of it so that you aren’t leaving money on the table.

Scale back

If you can’t find any extra money to contribute to your retirement account, cut your spending. You may be able to reduce your cable or cell phone bill by reviewing your usage and reducing or eliminating extras you don’t typically use. With a little effort, you probably can find ways to cut back without sacrificing the things you really enjoy.

Be more aggressive

If your retirement portfolio is heavily invested in fixed income and cash investments, increasing your exposure to stocks may offer the potential for greater returns. Just be sure you’re comfortable with the added volatility and risk that come with stock investments and make sure retirement is far enough away that you have time to weather a market downturn.

Hold off on taking Social Security

The longer you wait to collect Social Security benefits, the larger your monthly benefit will be. If you’re still working or can get by without the payments, consider waiting at least until your full retirement age—or longer if possible—to receive Social Security benefits.

Rethink your retirement lifestyle

If you’re still coming up short in the savings category, you may have to adjust your lifestyle expectations in retirement. Downsizing your home or moving to an area with lower property taxes and living costs may be worth considering. While it’s true that some costs will be less once you retire, other expenses may take their place. Don’t forget about your emergency fund. It’s just as important to have money available for unexpected expenses in retirement as it was when you were working.

Keep working

Spending a few more years on the job gives you the opportunity to add more money to your retirement account. If you can’t or don’t want to continue to work full-time, consider working part-time in retirement to add to your income. And you still may be able to contribute to an employer’s retirement plan or an individual retirement account.

Catch-up contributions

If you’re 50 or older in the year of contribution, you can make an additional contribution of $1,000 to your IRA.

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Participating in employer retirement plans

When money is tight, it may be tempting to avoid contributing to your employer-sponsored retirement plan. But resist the temptation! There are many advantages to participating in your employer-sponsored plan. Your contributions are pre-tax, giving you more money to invest. Your earnings are not taxed until you withdraw the funds. If you change employers, you can roll the funds into an IRA or your new employer’s plan. Your employer will likely match your contribution too, which is like getting free money!

In addition to your employer making it easy for you to set up contributions from your paycheck, you'll also get professional investment management. The provider of your employer-sponsored plan should offer several options that combine different types of investments into a diversified portfolio that matches your age and tolerance for risk. Sure, you will pay taxes on your contribution and earnings when you begin to take the money out at retirement, but because your earnings will have accumulated tax-deferred until then, you will have saved much more money than if you had simply made deposits into a taxable savings account.

If you are a low- to middle-income taxpayer, you may also be eligible for a tax credit for contributions made to a 401(k) plan. Generally, to qualify for this credit, in 2014, your AGI is limited to $60,000 for married couples filing jointly, $45,000 for heads of household or $30,000 for married individuals filing separately and for singles.

Even if you can’t contribute a lot to your plan, any little bit you can contribute will help. If you’re not participating in your employer’s plan, talk to your human resource manager to find out how you can sign up.

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Retirement income breakdown

The importance of retirement planning can't be overstated. While retirement may seem like a lifetime away, no matter what your age, you should be saving now.  You need to set clearly defined goals, identify income gaps and put together a plan to address those gaps.

Fortunately, you have several sources of retirement income. Unfortunately, you can’t rely solely on any one of these sources. And it’s not all free money, so you do need to save.

If you’re employed, you know that a part of your paycheck automatically goes to Social Security.  It’s the government’s way of forcing you to save for retirement. Social Security provides up to 40 percent of income for people 65 and older. While it’s not likely that Social Security will go away anytime soon, the number of people collecting benefits is growing faster than the number of people who pay into the Social Security program. This means that changes are likely to happen.  You could see additional taxes on Social Security income, an increased full retirement age, and/or reduced benefit amounts.

Your employer may also offer a retirement plan in which you can participate. The best part is that your contributions are made with pre-tax dollars and your employer may match your contribution in part or whole. While it may be difficult to give up part of your paycheck today, these contributions can really add up and the deferral will be worth it.

Individual Retirement Accounts (IRAs) offer tax advantages and can be an excellent way to put aside money for retirement. Most wage earners and self-employed individuals are eligible to open a Traditional, Roth or SEP IRA.

Even if you aren’t eligible to contribute to an IRA, you should still put money aside earmarked for retirement. While it might be more fun to spend all of your earnings now, don’t be tempted, just in case your other retirement funding sources change.

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When to save for retirement

The earlier you start saving for retirement, the better. If you start saving in your twenties, not only will you save more, but you’ll also be less stressed later. 

When you’re in your twenties, retirement is such a long way off that it’s difficult to take it seriously. But time and compounding interest help build up your savings. The longer your money is invested, the more you’re likely to have when you retire. During these years, you may want to put a significant portion of your savings in stock investments, which have the most potential for long-term growth.

To give you some perspective, if you start saving $100 a month at age 25 and earn an average annual total return, compounded monthly of eight percent you’ll have $349,101 at age 65.  Even if you double your monthly savings to $200, if you wait until 35 to start, you’ll only have $298,072 at 65.

When you’re busy with your career, community and family in your thirties and forties, it’s hard to focus on your future retirement finances. However, it’s extremely important to continue saving and building your nest egg, even if money is tight. With many years remaining before retirement, keeping a significant portion of your portfolio in stock investments may still make sense.

As you near retirement, you should still keep saving. After all, the more you save before you retire, the more you’ll have later on. If you’re worried about falling short of your goal, increasing your contribution can still make a notable difference in the amount of money you’ll have for retirement. At this point, you may want to shift some of your stock investments into less volatile bond and cash equivalent investments since you’ll have less time to recover from any stock losses. However, you may not want to abandon stocks completely since inflation will still have an impact on your savings, even after you retire.

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