If money matters keep you up at night, you’re not alone. Regardless of their age or stage in life, many people worry about their future financial outlook. But there’s one primary concern that seems to surpass the rest: retirement. In fact, more than half of Americans worry that they won’t have enough money saved when their retirement date arrives.1
Saving for retirement doesn’t have to be stressful. The key to building a secure nest egg lies in advanced planning and preparation. To know if your retirement savings are going to last, you have to take a step back and ask yourself: how much is enough? I sit down with retirement plan participants on a regular basis, and when I ask them how many years they have until retirement, a large majority are unsure — some haven’t thought about retirement at all.
Having a clear idea of how much you need to retire and when you are financially able to quit working are essential to living a comfortable, stable retirement. From the early stages of saving to your final working years, there are a few steps you can take to help ensure your funds will last:
What Are Your Needs?
Believe it or not, many people have no idea how much money they spend each month.
If you aren’t proactively tracking your spending on a regular basis, it is impossible to plan down the road, let alone know if your money is going to last through retirement.
If you haven’t already, create a budget and track your spending for a few months.
This will help you identify savings opportunities and assess areas where you can rein in your spending. When you have an idea of how much you can reasonably save in line with your budget, you can allocate more funds to your individual retirement account (IRA), 401(k) plan or other retirement accounts. Staying on top of your budget today is essential to determining — and preparing for — your future retirement needs.
But your current budget and spending aren’t the only factors you’ll need to consider when determining your retirement savings goal — it’s also important to think about what expenses you’ll have in retirement, including housing, food, vacations and health care. You also need to consider what income sources you may be able to depend on — such as your accumulated savings and Social Security payments — and weigh those against your expenses. Determine what you’ll be able to reduce in retirement and which of your expenses may increase (for example, health care). An advisor can help you compile all of this information and ensure it’s reflected in your savings goal.
Remember to take inflation into account, as well. Over the long term, inflation can pose a large threat to retirement security, since your savings should cover, at most, a 25 to 30-year horizon. Health care, for example, is a major area of expense and risk, since health care costs continue to rise well above the general rate of inflation. Your advisor can also work with you to ensure this protection is factored into your retirement savings plan and investment portfolio.
Once you have a handle on how much money you will need to live on each year in retirement, estimate the number of years that you will live in retirement. Now, do the math: that number is your target retirement balance. Set your sights on this goal and determine what steps you need to take to get there. Work with your advisor to develop a plan, and consistently review your savings amount and investment choices to assess what needs to be modified or changed so you can stay on track to achieving that goal.
Boost Your Savings
Retirement planning is an ongoing process and evolves as your life changes. If you’re contributing to an employer-sponsored plan like a 401(k), work with your advisor to determine the amount of annual wages you need to defer into your plan to reach your retirement goal. If necessary, take baby steps when selecting your contribution amount; a three-percent deferral is a great starting point. Over time, challenge yourself to increase your contributions periodically. Consider setting reminders to increase your deferral percentage by one percent every six months. That way, you can stay focused on making the most out of your savings.
Another great way to maximize your employer-sponsored plan is to take advantage of any matching contributions your company may offer. If possible, defer enough into your plan to get the full benefit. If you’re unable to defer the full match right away, try incrementally increasing your contributions over time to reach this amount.
This is free money so don’t pass it up!
Beyond your employer-sponsored plan, you might also consider dedicating a portion of your savings to a Roth account, in which your funds can grow tax-free. In retirement, your Roth assets can become your tactical assets. Since you’ve already paid taxes on those funds, you can use them to supplement your expenses, but remain in a lower tax bracket.
For example, let’s say that you and your spouse need $80,000 per year to live on in retirement. To stay in the 15 percent tax bracket, you can withdraw $74,900 out of your pre-tax accounts and take the additional $5,100 from your Roth account. Obviously, it’s important to sit down with your financial and tax advisors to talk through this strategy and decide whether it makes sense for your situation. But having both traditional and Roth savings can give you the flexibility you need to be strategic with your savings withdrawals when retirement rolls around.
Stay on Track
As your life and financial situation changes, be proactive in adjusting your savings plan (if needed), sticking to your budget and keeping your eye focused on the retirement you want to have. Regroup with your advisor to ensure that if your situation or goal has changed, your plan has changed with it. As you get closer to retirement, your advisor can also help you develop a withdrawal plan that can meet your changing needs and expenses throughout your retirement years (click here to learn more).
Take advantage of catch-up contributions into your retirement plan once you reach age 50, as well. For 2015, the catch-up contribution limit for those age 50 and older is $6,000. That can go a long way to helping you make the most out of your savings, so consider increasing your contributions to reach this limit, if you’re eligible.
When planning for your retirement, rely on a qualified advisor to help you determine how much you will need, the best way to accumulate those assets, and finally, the strategy for withdrawals that is ideal for your situation. Saving early, planning ahead and making the effort now will help make your retirement something to look forward to — not a source of worry or stress.