Much of the confusion around retirement planning has to do with folks not understanding that it's more than simply saving and many retirees make mistakes that cost them dearly. Good planning involves actionable steps to visualize moving from where you are today to your desired tomorrow. Here are six ways to make that idea a specific, detailed plan toward your desired retirement:
Step #1: Set Reasonable Income Goals
We would all love to be millionaires in our retirement, but that’s not necessarily a reality, or even a priority, for everyone. A realistic retirement plan starts with identifying what you really want and envision as a livable, enjoyable income in retirement. For some that might be $50,000 a year. For others, it might be $300,000 a year. Whatever the number, take some time to determine the true cost and spelling out why it should be that number. How you get to the number defines your retirement date.
Step #2: Determine Where Your Income Will Come From
Most of us assume our work will be enough and whatever is taken out of our paychecks will pay for our later years. For the few with a defined pension plan, that might still be the case. But for the rest of us, the exact income sources will matter. If more is needed when you're retired anticipate then that it will be a mix of retirement savings, Social Security retirement benefits, and potentially still working more. The worst surprise that can come up in retirement is realizing you don’t have enough and realizing you will need to go back to work.
Step #3: Evaluate the Necessary Real Savings
This is where time comes into play. Based on your target goal of income per year determined in step #1, evaluate how much you need to save. To get an idea of whether you're on track with your current savings, take a look at our Retirement Goal Calculator to give you a general sense as to whether you're on track. There is more that goes into this simple calculation, but it will at least give you a broad sense of how close you are to retiring on time.
Once you determine whether or not you're on track, evaluate your current savings rate and consider enhancing your savings, if necessary. For someone in their 20s, saving 10-15 percent of net income (after taxes) is probably sufficient. But if you’re in your 40s or 50s, you have less time and need to save more for the same level of income. Start by contributing to pre-tax retirement savings in your Traditional IRA or 401(k) accounts first as this will likely cost you less in taxes later on, assuming you will be withdrawing in lower tax brackets. If there is an employer-match in your 401(k), make sure to contribute this amount at the very least as this is "free money" for you. If you still have funds to contribute toward retirement in addition to your 401(k), consider contributing to a post-tax Roth IRA. IRAs are carry an annual limit and there are income limits as well. Read more whether a Traditional IRA or Roth IRA is best for you. Whatever that amount is, add it to the rest of your savings to get to your overall percentage target each year. The combined amount will be your retirement savings rate.
Step #4: Take a Look at Your Health & Family History
If you have family members living into their 90s, and even into their 100s, there’s a good chance you’re going to genetically do the same. So, your retirement savings plan needs to account for this longevity and you will need more for retirement than some of your peers. If, on the other hand, you’re closer to the average mortality rates, take that into account as well. No one knows for sure how long they have, but with advances in modern medicine, people generally are living much longer than previous generations. Your retirement has to account for this fact if you want to live comfortably.
Step #5: Consider Health Insurance Coverage
Many folks select an age for retirement and act on faith that everything will fall into place by the time they reach that age. But, practical issues often get in the way. The most common is health insurance coverage. Folks who retire before they are eligible for Medicare coverage (a required government-sponsored health insurance program for seniors age 65+) find they are suddenly burdened with significant medical costs, both premiums and out-of-pocket costs. Then they have to un-retire to afford medical help needed. To gain a sense of how much this might cost you, review the Plan Finder on HealthCare.gov to you can incorporate this cost into your retirement plan. The best health insurance, and in most instances the most cost-effective, is to maintain your employer-provided package while still employed. Then, at age 65 you can go on Medicare. But, don't let healthcare costs prevent you from achieving your desired retirement goals, just make sure you are planning on the additional cost if you desire to retire before reaching Medicare-eligibility.
Step #6: Starting Late Is Better Than Not Starting at All
Starting late to save and plan for retirement is still a good idea versus no planning at all. In most instances, Social Security will not be enough, so don’t assume it will be your safety net to cover all your desired expenses in retirement. If you wait to start saving & planning in your 50s, you will have a higher climb and have to save more aggressively, but you gain advantages. After 50 you can put more in tax-advantaged 401(k) plans ($6,500 more for 2021) and IRAs ($1,000 more for 2021), setting more aside for retirement. You will likely have more discretionary income as your major bills will stop, such as mortgage, the kids’ college tuition, loans, etc. Use those additional funds that have freed up to save more as well. These changes are simple, easy to make, and hardly make a dent in our overall lives.
Investment Advisory Services offered through EnRich Financial Partners LLC, a Registered Investment Advisor.
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