Many people hope to enjoy a long, comfortable retirement but do not know how they are going to get there. This article is an introduction to retirement planning for those whom have not yet considered the subject. What’s the bottom line up front? Most people will have to save if they wish to achieve their dream retirement.
The objective of retirement savings is to provide an income that will meet or exceed your lifestyle needs when you are no longer working. It doesn’t really matter how one achieves this, as there are plenty of ways to skin the cat. Once you have secured the resources to meet your lifestyle needs you can retire be it in your 20’s or 70’s. My wife and I did it in our 30’s.
It Is Never Too Early To Start Saving
Thanks to compounding interest, it is to a person’s advantage to begin saving early. The earlier you start, the longer your savings will be able to grow and work for you. You can even start saving before you complete your retirement plan if you want. Simply, the more money you stash away early, the more options it will provide for you further down the line.
As a rough estimate, if your investments make a 10% return every year and you reinvest that money into the same account, it will double in seven years. I always use a more conservative double every ten years for my planning – which still assumes a decent return.
The sooner you start saving, the better your chances of retiring in comfort and at an earlier age. To get the most of your savings, it is best to develop a plan that accommodates predictable life events such as weddings, buying a home, any college funds and is also flexible enough to allow recovery from unexpected life events such as your mid-level management job at Enron disappearing over night.
Take Stock Of What You Got
Determine your Assets and Income. Is the income steady or reliable? What is your current disposable income? How much can you comfortably afford to save and not see again until you are in your 60’s or 70’s?
Estimated Retirement Expenses
How much do you expect your retired cost of living to be? Be realistic in your estimations. How often and in what manner would you like to travel? Are you the go camping for a week twice a year traveller or would you prefer luxury cruises? Will you still have a mortgage? Rent? Provisions for healthcare and dental?
Determine How You Will Meet The Estimated Expenses
What options can you make available to yourself in the future? Does your job offer a defined benefit pension? Do they offer a defined contribution pension (much more likely these days)? Will you buy into Traditional and or Roth IRAs? Have you got rich and benevolent family elders from whom you expect a generous inheritance? Social Security? Part-time work?
There are many calculators available online to help you predict what your return may be. When deciding where to start saving your money, consider the fund costs over time. Also understand that the greater the potential reward, the greater the potential risk.
Most people adjust their investments as they age to secure the returns they have made. If you have not selected a product that does this for you, you’ll have to do this yourself.
You can visit the Social Security website and the will tell you what your estimated retirement payout will be. At the time of writing there are known issues with Social Security funding, I always lowball their estimate.
Can you afford to contribute more to your retirement?
Stay The Course
It is important to remember that for most people retirement savings is a long-term solution. I always treated my investments as if they were locked away and that my contributions would only be allowed to increase. When the market tanked in 2008 I was not concerned, in fact I bought MORE. As the market gained my returns reflected it. The point being, that day-to-day movement of the market is not really my concern as I’m in it for the long-haul. In the past the stock market has been very resilient. I’m under no illusions, the market will boom and bust again – each will provide opportunities.
These are very basic definitions, not complete descriptions. For details on contribution limits and early withdrawal penalties consult with a plan provider or the IRS.
Traditional IRA– A pre-tax savings instrument that is allowed to grow tax free until time of withdrawal. The Good? It lowers your taxable income when you are working. The bad? You pay taxes when you pull money from it BUT you are likely to be in a much lower income bracket so you end up keeping more of your money.
401K– An employer offered savings instrument very similar to a Traditional IRA where oftentimes an employer will (but not always) match an employees contributions to a certain extent. According to the IRS this is the most popular retirement savings plan in America.
Roth IRA– A Roth IRA is a post tax savings instrument. It does not lower your taxable income whilst working, but you don’t have to pay taxes on your withdrawals after age 59 ½.
Defined Benefit Scheme- This pension used to be the norm but is less common now due to costs. It told a person what pension payout they would get upon retiring, often as a percentage of their salary.
Defined Contribution Scheme– This has become the norm. A person invests money into a savings plan and their pension payout is determined by the plan’s success or failure.
The Internal Revenue Service: www.IRS.gov
The Social Security Administration: www.ssa.gov