Retirement Planning Week is a Time for Action
This week is Retirement Planning Week. It’s a week for action, not for contemplation.
Everyone needs to participate actively in their own retirement planning. Gone are the days of retiring with a pension, and Social Security was never intended to be the sole source of retirement income. According to the Pension Benefit Guaranty Corporation, only 19 percent of all retirement households receive a pension. Social Security only replaces 40 percent of the average worker’s pre-retirement salary, even less if you have a higher-than-average income.
By now, most of us have filed our taxes, so we can easily see how contributing to a tax-deferred retirement savings plan helps reduce our current taxes. It’s a little harder to visualize how our contributions go towards building a comfortable retirement. Even people in their 50s and 60s have no idea whether they have saved enough and haven’t really thought through their retirement budget.
I was speaking with a good friend recently, and we got talking about our plans for retirement. She told me that she and her husband were planning to retire at age 62. I asked her if she had planned out how much they would need to have saved to be able to retire early. She admitted that she hadn’t, adding that “We’ll just cut back on our expenses.”
As a retirement planner, I can testify that living expenses don’t go down significantly when you retire, and then there are all the travelling and other activities you swore you would do once you retired. A better strategy is to assume that your retirement income will need to replace around 70 to 90 percent of your pre-retirement income.
It’s true that the younger you get started on planning for your retirement, the better, but no matter how old you are, the time for action is now. It’s National Retirement Planning Week. What does that mean for you?
Here are some specific actions you can take this week:
Action 1. Find out exactly what you need to save to replace your income when you retire.
Only 44 percent of workers have tried to calculate how much money they will need in retirement. The Penn Mutual website has a calculator on How much will I need to save for retirement? This calculator is built around some simple assumptions, and every situation is unique, so if you really want to understand your path to retirement, talk to an advisor. Having a plan is critical, as is having an advisor who can help you put a plan in place.
Action 2. Participate in your employer’s 401(k).
This is a relatively painless way to get started saving for retirement. The money gets taken out of your paycheck automatically, it reduces your taxes, your employer pays all the expenses and may even match your contributions.
Don’t put off saving. You’re better off saving a little bit when you are young than you are saving a lot when you are older. Which do you think gives you more money for retirement: Starting right after graduating from college and saving $100 a month for the ten years between age 22 and 32 ($12,000), or waiting and then saving $100 a month for 32 years between ages 33 and 65 ($38,400)? See here for the answer.
Action 3. Increase your 401(k) contribution.
If your employer matches your contributions, you should, at a minimum, be setting aside enough to maximize your employer contribution. Where else can you get an immediate 100 percent return on your money (assuming you get a dollar for dollar match from your employer)?
A few simple strategies for increasing your contributions while minimizing the impact on your budget:
- Increase your contribution by 1 percent of your salary every year for a few years
- Increasing your contribution percentage any time you get a raise
Developing a retirement plan with an advisor can help you identify how much you need to save and where you can find the money in your budget for saving.
Action 4. Don’t think your 401(k) is the entirety of your retirement planning.
The Federal government says you can contribute up to a maximum of $18,000 to your 401(k) (up to $24,000 if you are over 50), but putting that much money into a 401(k) is not always the right strategy for everyone. It’s not diversified, it’s pretty much locked away until you hit a certain age, distributions are taxable, and taxed as ordinary income.
You should certainly max out on your employer match, but then consider other ways to save and invest for retirement: Mutual funds, bonds, annuities, permanent life insurance, etc. The goal is to create a tax-diversified portfolio that consists of tax-deferred accounts such as IRAs and qualified plans and potentially tax-free accounts such as ROTH IRAs and life insurance. It’s good to have investments that are available to you to use no matter what age you retire and have minimal tax implications.
Action 5. Plan for living longer and retiring earlier than you expect.
It is not uncommon for people to live into their 90s or even past the age of 100. Your retirement savings needs to last a long time. One of the biggest fears for many retirees is outliving their money. Your advisor can help you diversify into investments, such as annuities, that can provide an income stream that you cannot outlive.
Just as you need to plan for living longer, you also must recognize that half of all workers retire before they originally planned, either by choice or by necessity. You will probably retire earlier than you expect, so plan accordingly.
These are just some of the actions you might take this week. Certainly you should give your financial advisor a call and either start or revisit your retirement plan. Retirement Planning Week is for everyone, no matter their age. Get a plan, have a plan, and know how much money you need for retirement. It’s not only about planning; it’s about action.