to Think About Retirement Planning
Retirement is probably
many years, if not decades, in the future. Yet, being able to afford a
financially secure retirement is expensive and understanding some of the
basics now and taking a few steps can make that retirement you dream of
a reality and even a few years sooner than what you think.
Any discussion on
retirement planning ultimately comes down to a few basic issues:
- What will it cost
to live after I retire?
- How much do I need
to have saved before retirement?
- What should I be
What will it cost
to live once I retire?
The answer to that question is truly unknown and the numbers can be staggering.
Many financial advisors suggest that your living expense after retirement
will be about 70% to 80% of what they were before you retired. For a couple
retiring today with a household income of $80,000, that means they will
probably spend $55,000 to $65,000 after they retire.
Estimating your retirement
income needs gets a little more complex. Let's assume you are currently
earning $50,000 per year, that you are 35 years old and that you want
to retire at age 65. You expect your income to go up 5% a year from now
until you retire. That equates to an annual income before you retire of
over $216,000. If you spend 70% of that amount after you retire, that
means you will be spending almost $151,000 per year. That sounds like
a huge number, but that is what 5% raises can mean and remember that inflation
will make everything more expensive.
annual living expenses after retirement.
Current household income
after retirement will be 70% of pre-retirement expenses, 5% wage increases,
taxes are ignored. Numbers are rounded.
How much do I need
to have saved before retirement?
The answer to this question gets more complex because you have to make
assumptions about Social Security, decide whether you want to deplete
your savings during retirement or leave assets to heirs, and how long
you are going to live. All of those are difficult assumptions.
Let's go back to our
example and assume that Social Security benefits (about $2,048 per month
for an average couple) will increase 3% annually, you earn 3% on your
savings and that your expense level after retirement increases 3% annually.
If you live 30 years after you retire and you are willing to deplete your
savings over the 30 years of retirement, you would have needed to accumulate
about $2,700,000 by the time you retire. If you earn 5% on your savings
and start now, you would need to save over $3000 each month to reach that
What should I be
The numbers in our example seem very large. But, do not let their sheer
size make you think that a financially secure retirement is beyond your
reach. In fact, a young age works very much in your benefit. You have
many years to put money aside for your retirement. The benefits of tax
deferred compounding work in your favor and the income tax laws provide
You will have four
sources of income when you retire, three of which you can control.
Benefits - While there has been a great deal of political debate
over the future of Social Security, no one is seriously talking of eliminating
it. You pay into the program through deductions from each paycheck and
you will probably receive benefits from the program when you retire.
However, Social Security benefits alone will probably not enable you
to afford the retirement lifestyle you want. Currently, the average
monthly benefit for a retired couple is just under $2,200.
is very little you can do to affect the size of Social Security benefits
you will receive when you retire.
Plans - Most companies, especially larger ones, have recognized
that providing qualified plans to accumulate funds for employees' retirement
makes sense. 401(k) plans have become very popular because both the
company and the employee can contribute funds to the plan. The government
has also recognized this and has increased the amounts that companies
and employees can contribute to plans. For 2017, employees can contribute
up to $18,000 into a 401(k) plan. In addition, the company can put additional
funds into the plan up to a total (employee and employer) of $54,000
There are three
things you can do to increase your 401(k) plan balance:
- Participate in
the plan. You usually sign up for the plan when you are hired.
- Contribute as
much as you can out of your wages into your account. The amount you
contribute is not subject to income tax and the more you contribute
the more you will accumulate.
- Most 401(k) plans
have some form of employer matching contribution formula. Each plan
is different, but try to contribute enough to get the full employer
Accounts - IRAs have become a primary tool to accumulate funds for
retirement. There are rules about IRA eligibility and deductibility,
and there are regular IRAs and Roth IRAs. Currently, the annual contribution
limit is $5,500 and over time your contributions can add up dramatically.
In addition, earnings on funds within IRAs are not taxed so the money
grows faster. By contributing $5,500 each year for 30 years and earning
6% on the funds can add almost $400,000 to your retirement nest-egg.
If you are contributing
as much as you can to your company retirement plan and still have some
extra funds available, contribute to an IRA.
- The final source of retirement income will be your other savings.
Accumulations in savings accounts and investment accounts, while not
enjoying the tax preferences of 401(k) plans and IRAs, are still a major
component of most individuals' retirement income. Saving more and earning
more on these funds can add greatly to your retirement lifestyle.
advantage of automatic savings plans with monthly transfers to a savings
account or investment account. Also, be sure that your investment strategy
is sound with consideration given to your goals, your time horizons
and your risk tolerance.
- Your cost of living
after retiring is going to be high, perhaps even scary.
- To have enough
money to retire with a lifestyle you want means that you must accumulate
a great deal of money before you retire.
- The future of Social
Security is uncertain and you should not count on Social Security providing
enough to make your retirement comfortable. It may just help some.
- Company retirement
plans and IRAs provide additional tax benefits that make accumulating
funds easier. Contribute as much as you can to these plans and save
additional funds in personal accounts.
Time is on your side.
Starting to take actions now can provide the peace of mind that you are
doing the right thing and will provide the funds for the retirement you
want decades in the future.