During retirement, you may yearn to travel the globe by plane or across the country in an RV. Or perhaps your wishes lie closer to home—tending your garden or fishing in the local lake. With these dreams in mind, consider what you can do today to build the future you envision.
“Most of us can look at someone in our lives, like a parent or grandparent, to see the importance of retirement planning,” says Shanna Tingom, AAMS, an independent financial professional and co-founder of Heritage Financial Strategies in Mesa, Arizona. “Social Security was never meant to be the only source of retirement funding. Today, it certainly won’t provide for all of your retirement needs.”
To set yourself up for the retirement of your dreams, plan ahead. Here are some strategies to steer you in the right direction.
Pay Now, Play Later
Starting to save even a little as soon as possible is more important than socking away large sums. “The earlier people can begin saving for retirement, the better off they’ll be because of the power of compounding interest,” says Joe Heider, financial advisor and president at Cirrus Wealth Management in Cleveland, Ohio. Begin saving reasonable amounts on a regular basis, he says.
Many people in mid- to late adulthood have to make choices about how to divide their financial resources. Competing goals may include funding your children’s education, paying down any debts, preparing to support aging parents and funding your own retirement, says Gordon Homes Jr., CLU®, ChFC®, CFP®, CASL, senior financial services executive and special needs financial planner at MetLife in Indianapolis. He presented a session on financial planning at NHF’s 67th Annual Meeting in Dallas in August. Starting to save, or taking steps to save earlier, will ultimately provide individuals with more flexibility to direct resources to meet all those competing goals, he says.
To better determine how much you’ll need to save for retirement, look at your budget, says Tingom. Figure out what you need to live comfortably. Then, subtract expenses that will not exist in retirement: for instance, your house and your car, if they will be paid off by then. Consider whether you plan to financially assist your children or grandchildren. Allocate for additional costs, such as co-pays, deductibles or other out-of-pocket medical expenses related to hemophilia, another bleeding disorder or other chronic health conditions you have.
Once you have a number in mind, add about 3% for each year until you retire, to factor for inflation. Then multiply that by the number of years you expect to live in retirement. “Your investments should provide that level of income, without touching the principal, each year,” Tingom says. For example, if you can live on $30,000 per year and expect to live 30 years in retirement, you’ll need to have about $1 million saved by then.
Building a retirement fund that will keep you comfortable and secure for a number of years typically entails a combination of retirement resources. First, enroll in an employer-sponsored retirement plan, such as a pension, 401(k), 403(b), 457(b) or Simplified Employee Pension (SEP), also known as a Simple IRA for small businesses. If your employer matches contributions up to a certain level, contribute at least enough to earn the full matching amount. Once you’ve begun contributing to the plan on a regular basis, work to gradually increase your contributions over time, even if it’s in small incremental steps, Homes says.
Next, if you are eligible, contribute to a Roth or traditional individual retirement account (IRA), suggests Homes. The difference between Roth and traditional IRAs is when you pay taxes. With a Roth, you pay taxes on the funds before contributing them; the funds grow tax-free, but you can withdraw money at any time. With a traditional IRA, you avoid taxes on the front end, but when you withdraw, the funds are taxable. If you are 50 or older, you can make catch-up contributions to these plans to help boost your retirement savings quickly. With the many options available, it may be helpful for adults over 50 to consult a financial planner to formulate a strategy.
Don’t forget to factor in Social Security, determining how much you can expect to receive based on your age at retirement. The Social Security website includes benefit calculators to help you set realistic expectations. “Social Security benefits can be drawn as early as age 62, but there are significant incentives for delaying until an older age,” Homes says. “The maximum benefit is achieved by delaying Social Security until age 70.” Also, remember to account for your health insurance coverage.
“Before contemplating retirement, people should look through all their financial resources to determine if they realistically have enough assets to retire in the way they want to retire,” Heider says. “If not, they may want to consider continuing to work, or work part-time.” Many people delay retirement to continue working at a job they enjoy or launching a different career. Some older adults perceive it as their second act, taking on a job that lets them stretch their skills or explore new interests.
Be realistic about your hopes for retirement. Start saving now, even if it’s a small amount. And talk with a financial planner to set your course for that trip around the world or that boat cruise on the lake.