For many, retirement planning brings up doubt. Some wonder if they’re saving enough on a regular basis, and whether they’ll have enough money to last through retirement. Others aren’t sure what age they’ll actually be able to retire at. If you have these concerns, you're not alone. The good news is that it’s easy to find out if you're on track with your retirement savings. Let’s take a look at some things to focus on.
Do you have a dedicated retirement account?
Most financial experts agree that you should use a tax-advantaged investment account to save for retirement, rather than a traditional savings account. The main reason is that the average rate of return on a retirement account is much higher than that of a regular savings account. The two most popular ways to save for retirement are through an employer-sponsored retirement account called a 401(k) plan, or an individual retirement account, commonly referred to as an IRA. If you don’t yet have a dedicated retirement account, it would be a good idea to meet with a financial advisor to talk through your retirement goals and find out which type of retirement account would be the best fit for you.
Are your current retirement savings sufficient?
The amount of money you’ll need in retirement will depend on several factors including your lifestyle and spending habits, where you’ll live, and the age you plan to retire at. While the exact amount you’ll need to save will certainly vary, there are some basic calculations you can do to see if you’re on the right track. According to some experts, you should aim to have a specific amount saved up by certain ages:
- By 30: the equivalent of your current annual salary
- By 40: three times your annual salary
- By 50: six times your annual salary
- By 60: eight times your annual salary
- By 67: 10 times your annual salary
Another thing to keep in mind is that your general expenses are likely to decrease by the time you retire. Your house may be paid off, you probably won’t have childcare and education expenses, and your transportation costs will likely decline once you’re no longer commuting to work. Many experts believe that retirees can keep their current lifestyle with just 80% of their pre-retirement income.
You should also consider Social Security. While there have been many rumblings over the past few years about the future of Social Security benefits, most experts believe that the Social Security program isn’t going anywhere. However, it’s very possible that future retirees may not receive the same level of benefits that are currently administered. Some retirement planning calculators allow you to factor in Social Security benefits to help you determine how much you should save, and you can also estimate your future Social Security benefits by visiting the Social Security Administration website. Based on the uncertainty of the program’s exact future however, you should treat these as estimates and not as guaranteed future income.
What should I do if I’m behind on my retirement savings?
If you ultimately find that you’re not where you need to be in terms of your retirement planning, it’s important to not be discouraged. It’s never too late to start saving for retirement or too late to make changes to your saving strategy. You might consider meeting with a financial advisor to chart a clear path forward.
If you are quickly approaching retirement and not on target for your savings goals, there are several options available:
- Make catch-up contributions to your 401(k) or IRA. The IRS sets an annual limit for how much you can contribute to a retirement account, but if you're 50 or older you can contribute additional money to help reach your savings goals faster.
- Delay your retirement. One option is to put off retirement for a few years so you can continue earning an income and saving. Your existing retirement savings will also stretch further if you don’t dip into them until age 70 or 75.
- Delay your Social Security benefits. If you’ve reached the full retirement age you’ll typically be eligible for Social Security benefits, however you can choose to voluntarily suspend them for a few years in order to receive higher benefits later on.
- Plan to retire in a place with a lower cost of living. If you live in an expensive area, consider retiring in a less expensive location.
No matter where you’re at in your journey toward retirement, it’s important to make saving a priority. Deciding when and where to retire are deeply personal, and you may not yet have a clear idea of what you’ll want down the road, but by being proactive with your retirement planning you’ll have a great shot of maximizing your golden years. Remember that it’s always a good idea to speak with a financial professional before making any big changes to your investment strategy, so you can understand the potential impact on your savings goals, as well as any possible tax implications. If you’re looking to start a conversation about retirement planning, or looking to open an IRA, don’t hesitate to contact us today.