It always seems that saving for retirement is a good idea in theory, but it’s not always easy in practice. The majority of Americans aged 40 to 60 have less than $100,000 in retirement savings, according to a survey conducted by TD Ameritrade in 2019. About 60% of people in the same survey said they believe that $1 million would be enough for them during retirement.
However, if most workers who are not far from retirement only have $100,000 in savings, they won’t be able to reach their $1 million goal by the time they turn 65 or even 75, even with aggressive contributions and investments. This means they will need to continue working even after retirement to avoid running out of money.
If you want to retire traditionally and give yourself a comfortable life instead of working until death, you need to take some steps now. Here’s how to start planning for retirement or get back on track.
01 of 06: Start Saving Early
Whether you are just starting a job after graduating from college or have been in the workforce for a few years, check out the retirement plans offered by your employer. Look for options such as:
- 401(k) (Traditional or Roth)
- 403(b)
- 457(b)
- Pensions
Enroll in your retirement plan as soon as you are able. The earlier you start taking advantage of this benefit, the more your savings will grow.
For example, if you save $50 a month (at the beginning of each month) and expect a 6% annual return, you will have $3,489 after five years, $14,614 after 15 years, and $23,218 after 20 years. If you save $500 a month, you will have $232,176 after 20 years.
Note: If you start saving when you are 25 compared to starting at age 35, your account will enjoy greater compound growth as a result of starting early.
02 of 06: Find the Right Retirement Account
Your employer may offer you one or several different retirement accounts, or they may not offer a retirement account at all.
If your employer does not offer a work-sponsored retirement account, open an Individual Retirement Account (IRA). This is a good option whether your job offers a retirement plan or not, but it is the best solution if you do not have any other means to save for retirement.
The main difference between a Roth retirement plan and a traditional one is when you are taxed (now versus later). The main difference between an IRA and a 401(k) is the amount you can contribute to your plan and whether the account is employer-sponsored. For example, contributions to an IRA are capped at $6,000 per year for 2020 and 2021 (or $7,000 if you are over 50). You can have multiple IRA accounts, but you can contribute the maximum across all your accounts.
Note: If you have a 401(k) account, the maximum annual contribution limit for 2021 is capped at $19,500; the limit increases to $20,500 in 2022. You can contribute $26,000 if you are over age 51; this increases to $27,000 in 2022.
03 of 06: Know Your Retirement Goal
You may
Your expenses during retirement will not be the same as when you are working. However, that does not mean you will have no expenses. You may need approximately 70% to 90% of your current income to cover yourself during retirement.
This can vary depending on many factors. For instance, you may reduce your housing payments if you downsize from a large home to a one-bedroom apartment. If you have multiple cars in your household, you can sell one of them to eliminate car payments and additional insurance costs.
It’s a good idea to plan now for what you will need in the future. If you want to maintain your current standard of living, be sure to contribute enough to cover those costs later in life. If you believe you will have lower expenses during retirement, you will still need to save, but you can adjust your goals accordingly.
04 of 06: Don’t Forget Social Security
Social Security is a monthly payment that essentially gives you a salary based on your income before retirement. The average Social Security benefit is $1,503 per month. If this is enough for you to live on, you may consider not saving as much for retirement. However, this is the current amount. It could be much less by the time you enter retirement.
Note: Social Security is just one part of your retirement income. It’s important not to rely solely on this source of income during retirement. Instead, save as if you do not expect it. That way, it will be an extra bonus if you later receive a Social Security payment.
05 of 06: Check Your Savings Annually
Although retirement plans require little maintenance, they still need your attention. Review them at least once a year. Are you making the most of your contributions? Is your employer matching your contributions as well?
Some retirement plans offer the opportunity to automatically increase your contributions by 1% each year. If you do not have this option or if you do not want it, still review your investments regularly. Ensure that you are still on track to retire at your preferred age with enough money to last through retirement, which may last for several decades for some people. Rebalance your retirement portfolio as needed.
Try to be bolder in your account when you are younger compared to when you are closer to retirement age. This means having riskier investments in your second, third, and even fourth decades of life. That way, if the stock market falls, you will have longer to recover from the drop. If you invest aggressively close to retirement age, you may not recover losses quickly enough. This could mean delaying retirement until you are older and eventually have enough money to comfortably stop working.
06 of 06: Make Retirement a Priority for You
With many aspects of your life demanding your money, it’s easy to put retirement on the back burner. If you are not close to retirement in terms of age, it is likely not at the top of your mind.
However, planning for retirement should be on your necessary to-do list. Even saving a little can go a long way. Continue to pay off your student loans or any other debts whenever possible, but find a way to contribute to your retirement account before it’s too late. Avoid taking loans against your 401(k) account unless it is absolutely necessary.
To avoid
Forget your retirement savings, set up automatic recurring contributions. This may come directly from your paycheck if you have an employer-sponsored retirement account. If you have an IRA, you can set up automatic payments to add funds from your bank account to your retirement account each month. If you do not wish to commit to automatic contributions, consider adding a monthly reminder in your calendar to do it instead.
What to Consider
- Start saving as soon as you have a retirement account, whether through work or your IRA.
- Set a retirement goal to ensure you are saving enough to cover the lifestyle you want to live in retirement.
- Social Security may also be available, but it is important not to rely solely on this money for retirement.
- Check your retirement account at least once a year and make necessary adjustments to help stay on track.
Source: https://www.thebalancemoney.com/retirement-planning-101-1289883
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