When balancing the household budget every month, how much are you setting aside for retirement? Retirement planning should be the foundation of your financial strategy. In addition to paying for housing, food, and other bills, you should allocate enough money for retirement savings so you will be prepared when you are ready to retire.
Are you saving enough for retirement? According to the 2019 Survey of Consumer Finances, families save an average of $255,130, and the median retirement savings is around $65,000. That’s not enough for most families
How much to allocate as part of retirement planning will vary based on factors such as when you plan to retire, the anticipated cost of living, how much income you can expect from pensions and Social Security, adjustments for inflation, life expectancy, and other factors. Some experts use the 80% rule, estimating that you need 80% of your current income to retire. For example, if you make $100,000 per year now, you will need $80,000 a year to retire, and if you plan to retire at age 65 and live to age 95, that’s a total of $2.4 million.
Of course, your retirement plan may use different criteria, but no matter how you tackle retirement planning, it’s important to have the right planning strategy and understand how to properly estimate your retirement needs. Here are four retirement planning tips to get you started.
Tip 1: Estimate how much you need to retire.
When determining how much you need to retire, there are four basic factors to consider:
How much will you spend?
The 80% rule is a good place to start. When you retire, you may be able to maintain your current lifestyle for less since you will be saving on Social Security payments (although you will pay income tax on Social Security benefits), health insurance (you will be covered by Medicare), and other expenses. You also won’t be putting money into your 401(k) and other retirement funds. However, there are other expenses to take into account, such as money to travel or to pay for supplemental health insurance.
How much will you earn on savings?
Your retirement funds will continue to grow. Morningstar estimates stocks have yielded an average return of 10.29% per year for the last three decades. Bonds have yielded 5.33% on average, and Treasury bills and savings accounts yield around 3%. While your investments and retirement savings will continue to grow, estimate a minimal return on savings to be safe.=
How long do you expect to live?
The average life expectancy in the United States is around 78 years. Various factors affect life expectancies such as lifestyle, genetics, stress levels, and more. Don’t underestimate how long you will need money or the retirement funds will run out when you need them the most.
How much can you withdraw each year?
To make your retirement money last, you need to determine how much you can afford to withdraw each year. A study from Trinity College in Texas—using average investment performance statistics and adjusting for inflation—found that if you withdraw 4% of your savings each year, it should last 30 years. So, if you have $250,000 in savings, you could withdraw $10,000 the first year, then adjust to withdraw 4% the second year, and so on. There are ways to improve on the 4% rule, but you can use 4% to estimate.
All four factors should be calculated into retirement planning when setting savings goals.
Tip 2: Start saving early.
You can never start saving for retirement too early. The earlier you start saving for retirement, the more money you will have at age 65. You may even be able to retire early.
Americans don’t save enough for retirement. In fact, 15% of Americans have no retirement savings at all. The experts say that your retirement savings targets should be based on your age and your income. For example, at age 35 earning $50,000 per year, you should have 1.3 times your annual salary in retirement savings. The more you earn and the older you are, the higher the percentage of annual income you should save.
Tip 3: Use various retirement savings tools.
There are multiple ways to save for retirement. Plan to use as many of these tools as make sense as part of retirement planning:
- Make maximum use of your 401(k) plan at work, especially if your employer offers matching funds,
- Use IRAs and Roth IRAs. Maximize your individual retirement account (IRA) contributions. You also should consider whether a conventional IRA or a Roth IRA best suits your needs. An IRA uses tax-deferred income while you pay taxes on a Roth IRA when you contribute to the account. An investment advisor can help you decide.
- Invest your retirement money to yield higher returns over time. A well-balanced portfolio will outperform savings account interest rates. The earlier you start investing, the greater the return.
- Use certificates of deposit (CD) and money market accounts that pay interest to put money away to invest in an IRA or a retirement account.
- There are other tools available from your bank or credit union to help you save. For example, iQ Credit Union offers the Easy Saver program which rounds debit card purchases to the nearest dollar and deposits the difference in your savings account.
Tip 4: Develop the retirement plan that’s right for you.
When it comes to retirement planning, everyone’s goals are different, and those goals change over time. For example, investment strategies change as your taste for investment risk changes.
That’s why you want to work with a retirement professional who can help you achieve your retirement goals. iQ Credit Union has all the saving and investment tools you need to get started and can help you keep retirement planning on track. We are committed to helping our members achieve both short-term and long-term financial goals.
To help you get started, be sure to read our guide, Retirement Strategies: Building a Successful and Secure Retirement.