Is Your Retirement Planning On Track?
“It's never too early to start saving for retirement. Make sure to check up on your retirement planning to ensure you'll have enough saved to live the retirement life you've dreamed of.”
It's a new year, which means it's the perfect time to add retirement planning to your financial resolutions.
Planning for retirement is often equal parts art and science.
I know what you're probably thinking. What do art and science have to do with retirement planning? It's quite simple and makes a lot of sense when you think about it.
There are two basic sides to a retirement plan:
The first is developing your vision of a fulfilling retirement life. This is the fun, artsy part. It takes some creativity and imagination. You're figuratively painting a picture of your dream retirement.
The second (and equally important part) is what it takes to get there.
What does it take to get there?
Well, planning of course. And planning for retirement is not easy. It involves making careful calculations in order to systematically guess the future. Getting flashbacks of 4th-grade science class and the scientific method yet?
While science is mostly objective, retirement planning in many ways can be a highly subjective exercise. The approach that works well for one person may not be the best approach for another. And no matter how well you hypothesize, there will always be unknowns in retirement.
One thing is for sure when thinking about retirement: it is never too early to begin saving and planning. The more you do of both of those, the more likely your hypothesis will come true.
Retirement Planning Infographic
We've created the infographic below to help you determine if you're on track with your retirement planning. The rest of this post expands on the ideas presented in the infographic. Read on for more details on how to start saving and planning for retirement.
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THE 3 RETIREMENT QUESTIONS YOU NEED TO ANSWER
You have likely conducted a fair amount of online research, been exposed to retirement options in the workplace or know someone who is a bit further along in the planning process. Those are great places to start. For additional sources of inspiration consider the following three points as you begin to sketch out your retirement plan:
- How much retirement income do you currently have?
- How prepared are you for retirement?
- How long will your retirement income last?
HOW PREPARED ARE YOU FOR RETIREMENT?
There are plenty of ways to save for retirement: 401(k)s, IRAs, annuities, stocks, CDs and other savings accounts. And of course, we can’t forget Social Security also counts towards retirement income. But have you taken the time to research your options and determine how much you’ll need?
Transamerica states in their 2016 Annual Retirement Survey that 30 percent of Generation Xers with a retirement plan have had to take a withdrawal or loan from their plan. Transamerica attributes this to low levels of emergency savings. But the fact that Gen X was the first generation to have access to 401(k)s throughout their careers means they had no precedents to learn from. Simply put, they were not prepared.
On the flip side, the survey says that 72 percent of millennial workers have started saving for retirement. Seventy-two percent of those who are saving are doing so through an employer-based 401(k) or similar plan.
Furthermore, a majority of millennials wish their employers provided more information about retirement. So millennials are on the right track. They’re already preparing for retirement by saving and showing interest in learning more.
Whether you've started saving or not if you haven't determined how much you need to save, now is a good time. There are plenty of tools out there that can help with this.
We really like this retirement calculator from CNNMoney. Once you’ve determined your current retirement income, use it to learn what percentage of your income should be going to retirement.
HOW MUCH RETIREMENT INCOME DO YOU CURRENTLY HAVE?
Now that you’ve taken the opportunity to calculate your retirement savings how do you feel about your retirement forecast? Do you feel confident you'll have enough saved to support your retirement goals?
If you answered no to that question, remember there are many ways to increase your retirement income. Here are just a few:
#1. Take advantage of company match
The best way to save as much as possible is to take advantage of the company match program your employer offers. If you are not saving the maximum amount available, you are not allowing yourself the chance to earn as much free money from your employer as you can.
#2. Pay off debts
Unfortunately, saving for retirement when you have debts to pay off is never going to work. Be aggressive to get those paid off. In our financial resolutions post, we talk about the Snowball Method of paying off debt. Pay off your smallest debts first and work your way up.
#3. Buy a smaller home
Do you really need 4,000-square feet of living space and a 5-bedroom home if you have no kids at home to use that space? You could sell, downsize and enjoy a much smaller mortgage so that you could save more toward your retirement.
#4. Spend less
Face it. We all spend money on things that are not important to us. Sure, that $5 latte is delicious, but what does it really do for you? The more you can cut back, the more you can save. It sounds obvious, but people tend to forget just how powerful saving can be. Take it from one of our favorite finance bloggers, Financial Fannypack who wrote a whole post about why spending less is better than investing.
HOW LONG WILL YOUR RETIREMENT INCOME LAST?
Did you know...
- That retirement can last for 30 years or more?
- You might need up to 80% of your current annual income to retire comfortably?
- The average monthly benefit paid by the Social Security Administration is $1,200?
When you are considering when to collect retirement benefits, one important factor to take into account is how long you might live. According to data compiled by the Social Security Administration:
- A man reaching age 65 today can expect to live, on average, until age 84.3.
- A woman turning age 65 today can expect to live, on average, until age 86.6.
The above are just averages. About one out of every four 65-year-olds today will live past age 90, and one out of 10 will live past age 95.
With your life expectancy age in mind, it might still be tricky to determine how long your retirement income will last. At the very least, however, you should now have a much better idea of how long you will need your money to last.
To further maximize the longevity of your retirement savings, keep healthcare costs and inflation in mind.
- Healthcare Costs: It's estimated that $283,000 is the amount a retired couple may need to cover their healthcare costs in retirement, and that is just using average life expectancy data.
- Inflation: Even a low inflation rate can reduce the purchasing power of your money. As depicted in the chart below, inflation can eat away at the purchasing power of your money over time.
RETIREMENT PLANNING: YOUR NEXT STEPS
Ready to dive deeper into retirement planning? Here are some suggested next steps:
- Build Your Financial Intelligence: Now is the time to begin learning more about investing and personal finance.
- Keep Accurate Records: Good record keeping is essential. Run your finances like a business.
- Never Raid Your Retirement Accounts: This should go without saying, but never raid your retirement accounts to support your current lifestyle.
- Think Long-Term: Your habits will determine your success. Every day you make a choice between consuming today, and delaying gratification by saving and investing for consumption tomorrow.
In conclusion, retirement planning never ends. Just as you regularly balance your budget (hopefully!), taking an active role with your retirement planning will help minimize surprises. Before you know it – SURPRISE! – you will be preparing for retirement. Speaking of preparing for retirement, stay tuned for our upcoming blog post aptly named: Preparing for Retirement. Sign up for our newsletter to receive our blogs right in your inbox, so you don't miss it!