No matter your age, retirement can seem far off, set at some unknown point in your future. Failing to contribute towards your retirement can leave you and your loved ones in a difficult situation. However, with the retirement plan in place, time is on your side.
If you’re in your 20s or 30s, you should contribute even the smallest amount to your retirement account as compounded interest makes an essential impact on your retirement savings. For example, if you invest $300 monthly beginning at age 20 and do this every month until you’re 60 years old while earning an 8% return, you’ll have $1 million, as reported by Forbes. If you wait until you’re 30, all things being equal, you would only have $440,445. That’s an expensive 10-year wait!
Now, let’s fast forward to your 50s when retirement becomes closer into focus. Say, for example, you don’t have a considerable amount saved for retirement at this point in your life – whether it’s because of life issues or procrastination. Many people in their 50s aren’t prepared for their inevitable retirement years. For example, according to Vanguard, in 2016, for people ages 55 to 64, the average retirement account balance was only $178,963.
For people ages 45 to 54, the average retirement account balance was only $116,699. If, for example, your retirement account balance was $178,693, and you retired at 65, you would be able to live off of this money for only 14 years! That’s roughly $13,043.28 per year, or $1,086.94 per month, before taxes and without the addition of Social Security or any other income streams. That’s not much of a monthly or annual income.
So, what steps should you take to help you achieve your retirement goals? What if you’re 25 and just starting? What if you’re 50 and trying to catch up? Let’s jump in and explore some options for everyone.
How to Save for Retirement – The 13 Point Checklist
- Start now. If you’re 25 or 50, start now and invest regularly. Make saving and investing a habit, even if it’s only $50 per month. As we’ve discussed above, every little bit can help.
- If your employer has a 401(k) or a 403(b) plan, contribute enough to the plan to receive the employer match, if a match exists.
- If you’re in your 50s, take advantage of the higher deferral contribution limits to your employer qualified retirement plan.
- If your employer does not offer a retirement plan, open a Roth account or a traditional IRA.
- Build a safety net/emergency fund in personal savings. Contribute as much as you can to a personal savings account.
- Review your investments. Don’t just choose your investments and then leave your money there until you retire. Look at what you’re earning. Do you need to make some changes? Should you hire an investment advisor to get the most out of your investments?
- Keep your investment costs down. Watch your investment fees. Lowering your investment fees can make a significant impact on your savings over time.
- Contribute to your savings and pay down your debt. Don’t focus solely on your debt and ignore your savings.
- Automate your savings. Automatically deduct your 401(k) and 403(b) contributions. Direct deposit a portion of your paycheck to your savings account. Take a look at apps like Acorns or Stash to automate savings through daily round-ups.
- Pay off or reduce your mortgage.
- Reduce your living expenses and your daily/monthly spending.
- Ask for a raise. Work towards a bonus or commission payment. Work overtime. Work a part-time job. Figure out a way to bring in extra income that you can contribute towards savings. Working an additional 5 hours on the weekend is enough to jumpstart a retirement account.
- Protect your future with disability insurance and long-term care insurance. You don’t want to use your savings in the event of a disability or for those last years of life.
What You Should Avoid – The 5 Point Plan
- Keep in mind, you need to prepare for not just living expenses, but for the life you want to live. Do you want to travel? Do you want to start a business? Do you want to take up a new hobby? Figure those expenses into retirement as well.
- Prioritize your child’s education over your retirement. This is a common mistake.
- Rely on Social Security benefits as your retirement plan.
- Cash out your 401(k) or 403(b) retirement benefits in between jobs. You get hit on taxes and, if you’re under 59 1/2, early distribution penalties as well, thus whittling down your balance. Your best bet is to directly roll your balance over to your new employer or an IRA, if permissible.
- Failing to increase your savings contributions after you receive a raise.
Retirement Pitfalls to be Aware of
- Don’t forget to plan for healthcare costs. Fidelity estimated that the average couple would need $280,000 in 2018 dollars for healthcare costs in retirement. This figure does not include long-term care. This amount for healthcare is a significant amount of your nest egg. Plan accordingly as this dollar figure will inevitably increase each year.
- Please don’t forget to keep inflation in mind and its impact on retirement funds. Inflation is not always accounted for when preparing financial goals.
- Keep in mind the effect that taxes have on retirement funds. Although you may prepare for taxes, don’t forget to plan for taxes for minimum required distributions from your employer’s retirement plan, as well as Social Security benefits, health savings accounts, taxable savings accounts, and other benefits or savings vehicles. You don’t want any surprises to come April.
- Consider delaying your receipt of Social Security benefits. For people born between years 1951-1954, the normal retirement age for Social Security benefits is age 66. If you wait until age 66 or 67 or up until age 70 to receive your Social Security benefits, not only do you receive your full benefit, but you may also be entitled to a credit that will last throughout the remainder of your receipt of those benefits. This also helps offset inflation.
This is quite a list. So, where do you start? What are your next steps? The keys to remember for the following steps are preparation and action. You’ll need to prepare continually, review, and recap. Most importantly, you’ll need to take action – save, invest, and repeat frequently.
What would your next steps look like? Here are some steps to get started:
- Review where you are. How much do you currently have saved? Are you contributing to employer-provided retirement plans? How much of an emergency cushion do you have?
- If you’re not investing or saving, put a plan into action and start automatically contributing to a retirement plan or an IRA. Also, begin automatically contributing to a savings account.
- If you’re already investing and saving, increase your contributions.
- Review your investments. Are you in the right investments? Are your investment fees too high? Should you hire an advisor?
- Review your monthly budget. Where can you cut expenses? What can you do without?
- Review your income stream. Where can you increase your cash flow? Can you ask for a raise? Work overtime or find a part-time job?
If you start with these action items, you’ll be off to a good start.
You’ll need to review these periodically – at least every year if not sooner. Also, continually educating yourself about financial wellness, investment, and retirement planning. You’ll benefit from the education, and it will keep you current on investment trends, like how much you’ll need for health care expenses during retirement or the state of Social Security. Once you make investing, saving, and retirement planning a habit, and start reaping the rewards, you’ll come up with your own ideas on increasing your wealth and security. Moreover, you’ll be better off for it.
For more information on where to get started talk to your HR professional or you can give your financial consultant a call at BAC.
No matter your age, retirement can seem far off, set at some unknown point in your future. Failing to contribute towards your retirement can leave...
If you ask Marie Forleo’s team what they think of their boss, they’re likely to respond with a resounding: “We love her!” At first glance,...
The IRS has increased the contribution limits for the tax favored Health Savings Account in 2019. Watch this brief video and get immediate access to...
Learn the pros and cons of setting up an employee financial wellness program for your company. From setting up a budget, to saving for retirement...
You’re Ultimate Open Enrollment
Looking for a way to make Open enrollment smooth, fun and educational? Take a look at our ultimate resource kit.
Everything you and your employees need to make your next open enrollment a success.
• Payroll Stuffers
• Benefit Summaries
Enter Your Name & Email to Get Your Open Enrollment Success Kit