Thinking about the future
It may be hard to imagine what retirement life will be like, regardless of your age. It may be even harder to know exactly how much money you’ll need to cover your expenses and how long you’ll need those funds during retirement. However, it is essential to understand the costs of living both today and in retirement, and how to prepare for them.
Most experts suggest targets of roughly 8-10 times income in retirement assets, thereby replacing ~85% of pre-retirement income and maintaining standard of living in retirement. While that savings rate may seem high, keep in mind that it doesn’t fully capture medical costs, which typically accelerate during retirement. Despite these significant projections of how much is needed in retirement, Americans are woefully underprepared for their savings needs.
Consider this data from a 2013 NIRS research report: 92% of working households fall short of conservative retirement savings targets (based on age and income) given retirement account assets. About 45%, or ~38 million working-age households, do not have any retirement account assets. Clearly, it’s critical that Americans take steps now to plan for a more secure retirement.
Think about it this way – as the captain of a ship sailing toward your financial future, you have the ability to plan for the retirement you covet. Planning today will enable you to chart your course through calmer waters as you steer toward retirement. You are responsible for setting yourself up for a more secure future – why wouldn’t you take steps to make your journey as successful as possible?
Estimate how much money you’ll need to live a financially secure life
To start, know your personal budget – how much you spend and how much you (can) save – today, and estimate your expenses for your future retirement years.
Set financial goals and understand of how much money you need to put away to achieve them. Include rainy day or emergency funds savings when doing so.
This budgeting will help keep you motivated and on track to realize your savings targets. Revisit your goals and savings plan annually, and after any major life event.
Don’t be afraid to consult an expert to help you think through and/or structure your plans.
Once you’ve flushed out your overall financial blueprint, consider the below tips to help you realize your retirement savings goals.
Tips and Tricks
Start saving today! The earlier you start, the more time your money has to invest and grow – don’t you want your retirement nest egg to be as big as possible?
Use appropriate retirement accounts and take advantage of their special features that encourage savings. Maximize your contributions to reap the tax benefits and employer match (if applicable) of your 401(k) plan. Consider IRAs to save additional money for retirement beyond what you can contribute to your 401(k).
Enable the automatic saving features of your accounts, when possible. For instance, you may elect to contribute to your 401(k) pre-tax, directly from your paycheck (this may also lower your tax bill). Also, you may be able to sign up for auto-increase; upping your 401(k) savings rate periodically at a predetermined rate.
Automatic transfers eliminate an administrative headache, as well as reduce the temptation to use the money for something other than saving for retirement. You can even set up monthly auto-save transfers between your bank accounts.
If you save in a regular bank account, be mindful of linking and/or using a credit/debit card or check book tied to it. The harder it is for you to spend your retirement savings unless truly necessary, the better.
Avoid early withdrawals from your retirement accounts; otherwise you’ll likely owe penalty fees and potentially additional taxes. Rigorous financial planning should help reduce the risk of needing to access your retirement savings unexpectedly (remember when we suggested allotting for rainy day and emergency funds?).
As you approach retirement age, you may be able to accelerate the amount of annual savings you put your into retirement account (catch-up contributions). If your savings fall short of your goal, you can always consider delaying social security or retirement itself.
If you invest your savings, try to minimize the fees you pay. Aim to choose lower-cost funds that meet your investment needs. Make sure the investment mix is diversified and appropriate given your personal financials, tolerance for risk, income needs, tax situation, etc. Seek qualified advice when necessary.
Again, tap the advice of experts when needed. Even the government has some helpful resources. For example, check out the “Savings Fitness” booklet from the Department of Labor.
Help your future self, today
It is essential to understand how today’s choices influence the health of your future finances. Realizing said impact highlights the importance of keeping your financial blueprint front of mind. Otherwise, you risk that the noise of life’s daily happenings shrouds the needed focus on your retirement aims.
Your long-term goals should provide a framework on how to make sound economic decisions today, as well as what concrete steps to take along the way. Remember, you are in charge of staying on target and securing your financial future – set yourself up for success!
Nari Rhee, PhD, The Retirement Savings Crisis: Is It Worse Than We Think? National Institute on Retirement Security [NIRS], June 2013