When is the best time to start saving for retirement?
The simple answer is, as soon as possible. Time will be good to you if you start saving for retirement as early as you can. We have created a chart to illustrate the power that time and savings can have when you leave time for your savings to grow.
Undoubtedly, it is never too early to begin saving for retirement. You can calculate how much your money can grow before you retire with this compound interest calculator.
Where should I invest money toward my retirement?
If you are putting your hard-earned money into a retirement fund, it is important to understand where it is going. Traditionally, retirement funds are setup through employers in the form of a 401(k) or an individual retirement account such as a Traditional or Roth IRA. Finding an option that is tax-deferred can be an advantage allowing more of your money to accrue interest over time.
Alternatively, if an employer sponsored retirement fund is not available to you, there are a variety of other ways to invest your retirement savings. You can invest in brokerage accounts, annuities, or even real estate. It is important to understand the tax implications of each.
How should I diversify my investments?
This is often dependent upon personal preference (whether you are a risk-taker or not) and your retirement goals. If you handle risk well, a stock-heavy portfolio may be a great option for you. Stocks, on average, return 10% annually. If you consider yourself risk-averse yet still have ambitious financial goals, a mix of stocks and bonds may be a better plan for you.
It is important to have a healthy mix of both to align with your goals. If you aren’t quite sure how you should allocate between the two, you can use an old trick from the finance world. Subtract your age from 110 and whatever remains is the the percentage of your retirement savings that should be in stocks, with the remainder in bonds.
Let’s take Clay, for example, who is 55 years old: 110 – 55 = 55 therefore a healthy allocation for Stan’s portfolio would be 55% stocks and 45% bonds
There is no magic answer as to how you should allocate your savings which makes having a financial advisor to point you in the right direction, quite helpful.
Should my investment strategy change as I age?
It is not uncommon for retirement to last several decades. As a result, you need your money to work for you as long as possible. Having savings that will continue to accrue interest is a good way to have your money grow even through retirement.
As you near or enter retirement, an option you have is set out the ‘spending income’ you know is needed for the short-term. The rest can then be invested; you can then replenish your ‘spending income’ when the market is up. When the market is down, you can rest assure that you still have plenty in your spending account while the rest of your investments ride the wave until markets come up again.
How much money will I need during retirement?
Try to set a goal of having at least 80% of your pre-retirement income as their post retirement annual income.
For example, if Jeff makes an average of $60,000 a year prior to retiring, he should be prepared to have at least $48,000 entering his bank account each year after retirement.
However, the amount you need per year in retirement also depends on what type of lifestyle you will lead. Will you travel often? If so, what type of trips will you take? How many monthly payments will you have? Do you plan to reduce some of your expenses from what they are now? What about your health? Medicare isn’t free and you’ll have deductibles, coinsurance and copays due to your providers just like you do now. Be sure to account for that when setting your goal.
You can’t know for certain exactly how much money you will need to allow yourself to have for retirement, but the more you save the better. It’s better to be safe than sorry.
Can I live off Social Security as my only income?
Well, it depends. For majority of Americans, Social Security benefits will most likely not be enough to continue a lifestyle similar to your pre-retirement lifestyle. It’s possible that you will be okay with simply relying on Social Security as your only income.
Keep in mind that your Social Security benefits only amount to about 40% of your pre-retirement income, according to The Social Security Administration. So, odds are that you won’t be able to live solely off of your Social Security benefits. Also consider that in 2018, the standard Medicare Part B premium is $134/month, so Social Security will be deducting at least that much from your monthly income benefits.
With that said, some people do rely on Social Security as the majority of their annual income after retirement. Those people may be comfortable with that amount if it is similar to what they made each year before they retired. However, Social Security was not intended to be your sole means of support during retirement, so any savings that you can on top of that monthly income will benefit you greatly.
You can use Social Security’s calculators to determine estimate like your monthly benefits, your spouse’s benefits, and even your benefits if you were to retire early.
How much money should I be saving for retirement?
If you have ever heard of the 50/30/20 rule and follow it, then you are already saving a good amount each month. The 50/30/20 rule is where you budget 50% of your monthly income for essentials, 30% for extra spending, and 20% for savings.
When thinking of retirement, you can treat 12% of that 20% you are already saving, as your retirement savings. About 12% of your monthly income seems to be a good average of how much you should save each month leading up to your retirement.
For example, if Jeff, from our earlier example, begins saving 12% of his average monthly income in his twenties, he will have saved up $338,400.
Others say that you should have eight times the amount of your annual income saved up by the time you reach retirement age. Jeff would need to save $251 more each month to meet this goal.
What If I’m behind on my savings?
Beginning to save too late and not saving enough are two of the most common reasons people don’t have enough saved for retirement. If you find you have not adequately prepared for retirement, there are a few things you can do.
- Create a budget: know what you have and how much you will be able to save each month
- Max your employer contributions: take advantage of any contribution matching programs offered through your employer
- Postpone retirement: plan to stay in your career a few extra years to build up savings for an even better retirement
- Downsize: are you using all of the space in your home? If not, consider downsizing and investing any equity you may have
It is never too late to begin saving. Still, the sooner you begin to save, the less worried you’ll be later on down the road about not having enough money to retire.
Can I survive on less?
When nearing retirement, you need to begin thinking about what things you can change in your living standards. Perhaps you can travel closer to home or clean your own home instead of employing a housekeeper. Maybe you are still living in a home where you raised your kids, and now it’s an option to consider a less expensive condo or apartment.
Think about all of the things that you spend money on and try to classify them into two categories: Necessities and Luxuries. Go through the Necessities list and see if there is any room for improvement? Could you reduce your cable package to one with less channels? Can you start turning up the temperature when you leave the home to reduce your electric bill?
Then review your Luxuries list and see if there are any luxuries you indulge in now that you can live without once you are retired.
If you find it difficult to reduce your expenses, then consider whether working for a few more years to pad your retirement account makes sense. You’ll be able to continue saving while also delaying your Social Security benefits. The longer that you wait to start those benefits, the larger your monthly check will be.
Another benefit of working longer is your access to employer group health benefits, which may allow to delay your entry into Medicare Part B, which has a monthly premium. The longer that your employer is paying for the majority of the cost your health insurance, the better it may be for you.
What if I’m running out of time?
It’s not uncommon for many of us to start saving for retirement in our 40s or even 50s. There are so many other priorities when we are younger, like putting our kids through college or paying off our auto loans. However, it’s never to late to begin.
If you’ve had a late start, there are several things that you can do to jump start your savings. Try maxing out your contributions to your investment vehicles.
If your employer has a 401K, be sure that you contribute enough to take full advantage of any company matching that they offer. Employees can contribute up to $18,500 per year to an employer-sponsored plan in 2018. Older employees can also contribute additional catch-up amounts under the law. If you are age 50 or older, you can deposit an additional $6000 per year into your 401K.
No access to a 401K plan? No problem. You can contribute as much as $5500 per year into a traditional or Roth IRA, with an additional $1000 catch-up contributions for those age 50 or older.
Also, if your employer group health plan is compatible with a health savings account, you can try to max out your contributions to that as well. Once you retire, you’ll then have a nice medical nest egg that you can use to pay for Medicare Part B and D premiums as well as doctor and prescription copays and other medical expenses.
Establish a budget for yourself now so you can easily see how much money you can afford to save each month.
What if I will still fall short?
The obvious answer is to delay retirement for several years to give yourself more time to save. You can continue maxing out your contributions to your retirement accounts. Because your are still working you can also delay withdrawals from what you have saved already, giving that money time to continue earning interest and compounding. It may only take a few years for you greatly increase what you’ll be living on in the near future.
Another option is to work part-time or do some temporary work through a local staffing firm. You can supplement your retirement income, meaning that you will withdraw less. Working also will keep you plugged in socially, which benefits you emotionally and mentally.
Do you have life insurance that you no longer need? Instead of just cancelling the policy, you can consider selling that policy in a life settlement. The sale of your policy might net you thousands. Some people also consider taking out a reverse mortgage to make use of the equity that they have in their home.
When will I be ok to retire?
Determining when you can retire can be tricky. Consult a financial planner who can help you estimate what you’ll need monthly during retirement. He or she can review your investments and any other sources of income to see if you’ve got enough to cover your monthly budget through your life expectancy. Together you devise a plan to work toward a retirement date goal.
Do you need help with estimating the costs of your Medicare healthcare in retirement? If so, give us a call so we can provide you quotes and options for your planning.