Planning for Retirement: How to Make Sure You Save Enough
Dreaming about the fun you're going to have after you've retired is the easy part. The difficulty comes in realistic forecasting and disciplined saving while you're still planning for retirement. If you follow a few fundamental rules, though, your road to a happy and secure retirement can be relatively stress-free.
Rule 1: Keep Saving
If you started saving for your retirement the moment you became eligible to enroll in a 401(k) or other workplace retirement plan, you've already made the best retirement planning move you could make — especially if your employer was willing to match your contribution.
Anyone without an employer-sponsored plan can still save through one of several types of Individual Retirement Arrangements (IRAs) including both Traditional and Roth IRAs. Entrepreneurs with no employees other than a spouse can create a Solo 401(k) plan.
If you've put off or interrupted your saving, the time to get going is now. Whether you're saving through an employer-based plan or on your own, procrastinating is a lost income opportunity. That's because the longer you save, the bigger boost you get from the power of compounding.
The compound interest applied to investment income makes funds grow faster than ordinary savings. With compounding, you not only earn interest on the amount you save, but you also earn interest on the returns over time.
To understand more about how compounding works, plug some numbers that seem reasonable for you to save, plus the number of years you have until retirement, into a compound interest calculator.
If you're approaching retirement and have fallen behind in your savings, check into whether you qualify to make catch-up contributions to your saving plan. The application of compound interest to those larger investments allows your retirement funds to accelerate even faster.
Rule 2: Set a Retirement Income Goal
Another key to successfully planning for retirement is a thorough assessment of how much you need to save. To start, use your current income as a base point. Many financial advisors recommend the "80 percent rule" as a guideline for how much you should save for retirement, meaning you should plan on socking away 80 percent of your preretirement earnings in order to live comfortably. You can adjust that benchmark according to your anticipated retirement spending.
Social Security, pensions, and other sources of income may offset the amount you need to save in your retirement fund. Remember that the amount of your Social Security benefits will depend on your earnings history and your age at the time of retirement. The amount you receive from your checks will decrease significantly if you draw benefits before reaching your full retirement age.
If you're married, your spouse's earnings and financial needs should be worked into the equation as well. Will they have their own retirement savings, or will your retirement income need to cover the both of you?
Rule 3: Don't Overlook These Costs
As you get older, health care costs can become a huge drain on your retirement income, as can any debt you carry into your retirement years.
Taxes are another expense to consider. With tax-deferred retirement accounts, the taxes are due when you start withdrawing that money. After you reach age 70 ½, the law requires you to take out a minimum sum each year, called the Required Minimum Distribution (RMD). There's no RMD for Roth IRAs because those contributions are taxed before withdrawal.
As you approach retirement, and during your retirement years, you may face changes in your lifestyle, health, or family situation that require an adjustment to your savings and investment plan. It's important to stay in touch with your financial planner so you can review the plan when major life events occur.
A change of plan doesn't have to derail your retirement dream. With an approach that combines consistency with flexibility, you can still achieve your ideal retirement.