Mapping the Road to Retirement
Somewhere along the road to retirement, it is a good idea to consult your “map.” Will your ride be smooth or filled with potholes? How far off is retirement day, and do you have sufficient financial resources to last the journey? Regardless of your current location along this road, it’s important to recognize that the financial “bags” you’ve packed may only take you so far.
The Sooner You Begin, the Better
Many people in their prime earning years don’t save enough for retirement. One advantage of being relatively young when you start a retirement savings program is that you can amass a potentially larger nest egg due to your longer planning horizon. The more you accumulate before you retire, the less you may need to worry about working after you retire to maintain your desired lifestyle. For these reasons, it is important to spend time now developing a well-organized plan—or “road map”—for retirement.
What does such a road map look like, and how can it help you reach your financial destination? Try using these five signposts as guides:
- Determine your retirement needs and resources. With people living longer than ever before, a sound retirement strategy may need to provide you with an income stream, indexed for inflation, that can last anywhere from thirty to forty years. Even with a 4% annualized rate of inflation, the cost of goods and services will triple in about 29 years. With this in mind, compare the amount of income you receive now to the amount you will have during retirement. Once you’ve analyzed this information, you will need to develop financial strategies to help provide you with your required income stream. What assets do you currently have? What savings plans do you have in place? As you review your retirement program, how will you fill any gap between what you have saved to date and your future retirement needs?
- Recognize that Social Security and pension benefits may not meet all of your needs. In the past, Social Security and a company pension have been significant sources of retirement income. However, the days of “living off” a pension or Social Security have passed. If you depend solely on Social Security or your pension, you may find your income is insufficient to meet your retirement needs. Developing a retirement savings program can help you account for any anticipated shortfall.
- Increase your personal savings. One single way to boost your savings is to set money aside on a regular basis. Stay disciplined, and consider adjusting your budget to save more as your financial situation changes.
- Take advantage of your company plan. If your employer sponsors a retirement program, consider contributing the maximum amount. This can help you take advantage of pre-tax contributions and accumulations on a tax-deferred basis. In addition, many employers match employee contributions—usually up to a maximum percentage. This is “free money” from your employer that automatically goes into your workplace retirement account.
- Use personal tax-efficient alternatives. Individual Retirement Accounts (IRAs) allow you to save on a tax-deferred basis. Contributions to traditional IRAs may be pre-tax, and funds accumulate on a tax-deferred basis; however, income taxes are due when distributions from the IRA are taken. On the other hand, contributions to Roth IRAs are made with after-tax dollars; funds accumulate tax free, and no income tax is due when distributions are taken. For tax year 2014, contributions to an IRA, or combination of IRAs, are limited to $5,500 ($6,500 for individuals age 50 or older). In addition, cash values of a life insurance policy and annuities may also provide tax-deferred opportunities.
You’re in the Driver’s Seat
Retirement may seem a long way down the road, especially when you have immediate and pressing family concerns. However, the younger you are when you begin taking advantage of your saving opportunities, the better off you will likely be when your retirement day dawns. Why not pause now to review your long-term strategies? When you reach retirement age, you will have hopefully navigated around any bumps on your road to retirement and secured a comfortable financial future.
Over 50? Retirement Savings Strategies
The Baby Boom generation is about to trail blaze into another new era: retirement. Never a generation to accept the status quo, they are ready and set to redefine the outmoded image of “golden years.” Forget about endless days spent in repose. This group seeks an unprecedented time of adventure, travel, creativity, and new business pursuits. While these exciting changes will redefine aging, will the Baby Boomers be able to finance their adventurous plans? Today, many age 50 and older have still not begun to save for retirement or have amassed insufficient funds.
If you are in this age group and find yourself facing an underfunded retirement, it is never too late to take charge. There are plenty of things you can do—right now—to get on the right track. Here are some ideas:
What’s it going to take? First, you need to estimate how much money you will need in retirement. Once you have an idea of the ballpark amount, you can work toward fulfilling that goal. You may need 60–80% of your current annual income in retirement. Your financial professional can help you assess the best figures for your situation.
Work it! If your employer offers a retirement plan, contribute as much as the law will allow. In 2014, you can contribute up to $17,500 to an employer-sponsored 401(k) plan. Those over age 50 can contribute an additional $5,500. Many employers also match contributions. Make sure you contribute enough to claim all of this “free” money, which can add up significantly over time.
Create a spending plan. In other words, make a budget. Many people think a budget will be restrictive, but look at it this way: You can spend now, or you can actually have the money to be able to afford your dream adventures. It is very important that you pay down debt now and, furthermore, do not accrue new debt. Examine your spending habits and replace some of your discretionary spending with saving. Even as little as $20 extra per week is a step in the right direction.
Take some initiative. On top of contributing to your employer’s plan, you can save even more by opening your own Roth IRA. Contributions are made after taxes, but earnings and distributions are tax-free, provided you have owned the account for at least five years and have reached age 59½. Those age 50 and over can contribute $6,500 a year in 2014. Eligibility for these plans begins to phase out with adjusted gross incomes of $114,000–$129,000 for single filers and $181,000–$191,000 for married joint filers.
Hang your shingle. Many Boomers hope to start their own businesses in retirement. But why wait? If you begin your entrepreneurial efforts now, your business has the potential to be in full swing by the time you finally do retire, and any profits between now and then can be added to your savings.
Move it or lose it. It’s very likely that your home may have significantly increased in value since you first bought it. You may have even already paid off the mortgage. With children at or near adulthood, do you really need that extra space? Selling now and moving to a smaller, more affordable location will allow you to transfer the equity in your home into a savings vehicle.
Why quit? If you want to pad out your retirement savings, consider staying on the job longer. Many people actually leave retirement to reenter the workforce because they feel more fulfilled in a working lifestyle. Others seek part-time work, consulting, or entrepreneurial efforts. If any of these situations sound right for you, you will earn more money each year to save, and you may be able to put off drawing down your savings.
With all of the above options, time and compounding will be to your benefit. Each year that your savings remain untouched will give them more time for growth potential. The Baby Boom generation intends to redefine retirement as we know it. With a few steps in the right direction, starting today, you will have the resources to usher change into a whole new era.