Planning for Retirement
It’s no secret that it’s getting harder and harder to be financially prepared to retire. Pension benefits continue to be cut in businesses around the country and social security benefits are like a pipedream for most Americans who are of working age now. Sadly, only 15% of working-age Americans have an IRA retirement account and only about 22% contribute to a 401(k) through their employer. As a result, many Americans are working longer and even facing the reality of not being able to retire at all.
Making the right plan for your retirement is critical to having the money you need available when you decide to stop working. If you need help planning for retirement or you have questions about the different retirement plans, give us a call at to speak with a financial resource professional. They can assess your budget and retirement savings plan, as well as provide recommendations on how to improve your strategy.
How much money do you need for retirement?
In the past, the general rule of thumb was you needed about 70% of your pre-retirement income to live comfortably during your retirement. However, simple calculations don’t work anymore for retirement. Rising health care costs and costs for prescription drugs, longer life expectancies, wide variations in pensions and social security benefits, plus dramatically different costs of living throughout the U.S. make it almost impossible to get an accurate number using a simple percentage.
The best way to determine how much money you need to retire is to map out a plan for your retirement and add up the estimated costs of your plan. You can use a retirement calculator to help determine an exact figure. Here are some of the factors that will play into determining how much money you need for retirement:
- What age do you want to retire?
- Do you plan on moving after you retire?
- What supplemental income will you have after you retire?
- Do you have any currently existing conditions (or a high risk family history for getting a condition) that will cost you money in care and/or prescription medicine?
- What do you plan on doing after retirement—i.e. do you plan to travel cross country or around the world, would you still want a part-time job, etc?
Basically, you want to calculate the cost of living per year for every year you will be retired. Keep in mind there’s a good chance you’re going to live longer than you think with the current rate of medical care and advancements. You also want to factor in costs for things like moving to a new state or travelling the world.
Setting up the right retirement accounts
Depending on social security benefits and pensions to still be around when you get ready to retire is a good way to end up working the rest of your life. As such, it’s critical to have a retirement savings account established so you can save as much money as possible. Then, if you get social security or pensions on top of what you’ve saved, that’s simply extra money you have to do even more with during your retirement free time.
You have two main choices when it comes to retirement accounts:
- 401(k) retirement account. A 401(k) is a retirement savings account offered through your employer. All money put into your 401(k) is deducted directly from your pre-tax income and shown on your paycheck. In some cases, your employer may have a plan to match all or part of your 401(k) contributions, which can be a big benefit in building your retirement account; you may have to reach a certain contribution amount for matching to apply. There is a $17,000 limit (for 2012) of how much money you can contribute per year. Taxes are deferred until you withdraw the money and earnings are taxable—although contributions are tax deductible. You can withdraw the money at 59.5 years without penalties or prior to that with penalties.
- Roth IRA retirement account. A Roth IRA is a private retirement account that you can open on your own. You can currently contribute up to $5,000 per year—any contributions are after-tax money and are not tax deductible. After retirement, all withdrawals are completely tax-free; you can even take out the money you put in with contributions prior to retirement with no taxes or penalties. All earnings are tax-free.
With two types of accounts, people often wonder which retirement account they should get. In truth, it’s to your advantage to have both. Most financial experts agree you should contribute first to your 401(k) up to the amount it takes to get your employer to offer a match contribution. Then put all your retirement savings money into your Roth IRA up to the maximum contribution amount of $5,000. If you still have retirement savings leftover, go back to putting money in your 401(k).
Making sure you’re financially ready to retire
Besides just making sure you have a saving strategy in place to get you ready for retirement, you’ll also want to get the rest of your finances as prepared as possible, too. Carrying large amounts of debt into retirement means a portion of that money you just saved in your retirement account will have to be used to pay back your debts. Instead of sacrificing some of your retirement plans to pay back debt, it’s better to make sure your debt is as low as possible before you retire.
- Pay off your mortgage. Owning your home outright can be a big advantage after you retire. Not only do you eliminate mortgage payments from your monthly budget, you also have more equity available in case you want to do something like a reverse mortgage once you reach age 65.
- Pay off your credit card debt. Credit card debts can take decades to pay off if you only make minimum payments, so there’s every chance you could still be paying your credit card debts back by the time you retire. Instead of facing a reality of paying back debt all the way through your retirement, consider using a debt reduction strategy now to reduce your credit card debt and ensure you’re debt-free when you reach retirement age.