Saving For Retirement

By: HCO

Beginning to save your money at a young age really does reap benefits for those who plan ahead. Understanding how to manage your funds can position you for a retirement with endless possibilities.

How do you picture it?

Reaching retirement is a big milestone. On top of all your hard work and saving over the years, it still takes foresight and planning for you to feel confident about exiting the workforce without a regular paycheck.

And retirement plans and dreams are as varied as each life. For each of us, happy retirement means different things. Do you hope for the time and resources to travel the world? Or do you look forward to the freedom to focus on family, friends and fun? Are you hoping to continue working part-time because you love what you do? Or do you want to reach your retirement savings goal as early as possible to pursue something different?

However, you picture your retirement years, knowing the lifestyle you hope to achieve can guide your plans. And, the earlier you have a strategy in place for saving, the better the chance your dreams can become a reality.

Take steps to set and reach your retirement goals

Figuring out your retirement savings plan can feel confusing and overwhelming. Here are a few steps to break it down.

Start as soon as possible

It’s never too early to start saving for retirement. The sooner you get in the habit of setting aside money for your long-term goals, the easier it is to maintain it.

Plus, the sooner you save, the more time your investments have to grow. The New York Times How to Win at Retirement Guide has a great example to illustrate the difference time can make in increasing your retirement savings:

Two people put the same amount of money away each year ($5,000), earn the same return on their investments (6% annually). But one starts at age 22, the other at age 32. They both retire at the same age (67). The investor who started saving 10 years earlier would have about $500,000 more at retirement.

If you’re well past age 22 or 32, don’t despair. The best time to begin saving is always today.

Figure out how much money you’ll need

No one can predict the future with certainty but applying some thought and common sense to what your expenses will be when you retire can help set you up for financial security for the rest of your life.

Here are some major areas to consider:

• Current income. Experts suggest that you’ll need about 70-90% of your pre-retirement income to cover your cost of living once you retire.
• Housing. You’ll need a place to live. Will your current mortgage be paid off? Do you plan to downsize? Don’t forget to consider the cost of rent, maintenance, real estate taxes and homeowners association (HOA) fees in determining your retirement housing costs.
• Health care. Some studies predict that medical expenses will account for 20% of retirees’ overall spending. If you plan to retire before you reach 65 when Medicare kicks in, you’ll want to factor in health insurance premiums that your employer may have covered. With Medicare, you will still have additional healthcare expenses such as prescriptions, dental and vision care.
• Travel, hobbies and other adventures. Build your dreams into your budget. Long vacations, more golf, opening a candle shop, starting a podcast? Whatever your heart desires, plug it into your retirement savings plan.

The internet is full of free retirement calculators where you can plug in your information to see how much it will take to get you to a secure retirement. A financial planner can also work with you to determine what it will take to achieve your goals and how you can get there.

Bring the pieces of the puzzle together

Your retirement income puzzle has several pieces. Here are the elements that will add up your financial future.

• Employer pension plan. Fewer and fewer employers offer a pension that pays a fixed amount of income to retirees. If your current or former employer is among those that do, that’s another piece to add to your retirement income picture.
• Individual retirement accounts/401(k) plans. Employers often offer 401(k) plans that allow you to set aside a portion of your paycheck, tax-free, for an individual retirement account managed by the employer. Some employers even match 401k contributions up to a certain percentage of your salary. With Roth IRAs, you contribute taxable income, but the growth on investments in the account is not taxable. There’s lots more to learn about the ins and outs and tax implications of these plans, and the Internal Revenue Service is a good place to start.
• Social Security. While Social Security may make up part of your retirement income, it will not be enough on its own. According to the Social Security Administration, beneficiaries receive, on average, 40% of their pre-retirement income from Social Security. Your Social Security payments can be higher if you wait longer to claim them. To determine your benefits at different retirement ages, you can create an account on the Social Security website at ssa.gov/myaccount.

Funding your retirement may also include other personal savings and investments. Many people also continue earning an income in retirement. U.S. News and World Report estimates that more than 25% of Americans 65 and older held a paid job or were self-employed. A new side gig may be part of a fulfilling retirement.

Get help from a financial planner

Determining how much money you need for your desired retirement lifestyle and having a plan on how to get there can give you peace of mind. It also motivates you to take steps to fill the gap while time is on your side.

A financial planner can support your goals and get you on the right track. They can assess your current financial picture, determine your comfort with investment risk and offer options to help you arrive at your retirement dreams on time.

Of course, as things change in your life and the wider world, it’s important to keep updating your plan to account for new factors. Like maintaining your physical health by seeing your doctor, don’t forget to have a financial checkup at least once a year.