Preparing for Retirement – Saving up for Your Golden Years
What do you think about doing when you’re finally done with with your career? You’ll have more time on your hands to pursue something meaningful like a passion project you’ve always wanted to do or you could go traveling multiple times a year. Maybe spend most of your days gardening, writing, or visiting family?
Retirement is both an exciting and scary time for many people. For most, retirement means they don’t have to go to work anymore and have the freedom to spend their time as they wish. While for others, retirement means not being able to work anymore and the permanent disappearance of their reliable incomes. If you have not saved for retirement in your working years, the consequences will catch up to you in your 60s.
Preparing for retirement is one of the most important aspects in planning for your financial future, but it also oftentimes take the back-burner. When you’re in your 20s and just got your first job, you probably only thought of how you could enjoy your own income. In your 30s and 40s, you were also busy raising a family, bought and financed a home and sent the children to school.
When the house is paid off and the kids are all on their own, you suddenly find yourself just a few more years away from retirement and the fear and excitement now seems more real. And if you haven’t started planning for your retirement several years back, you might face your golden years with stress and worry, instead of freedom.
Retirement is an event that ideally, we should all prepare and plan for. Before you make your graceful exit out of the workforce, consider how you want to retire and what are the steps that you need to take to achieve your dream retirement. And if this is not enough reason why you should plan for retirement, consider the following statistics that will make you give retirement another thought.
People are living longer. According to studies, one in four retired individuals will live up to or more than 90 years old. While this gives you more time to enjoy life, it also means you’ll need more savings to finance a longer retirement. If you retired at 60 and saved up for a 20-year retirement, you’ll have to find more money to use for another decade of your life.
Also, more than 40% of retired singles and 22% of retired couples depend on Social Security to finance their retirement. As of November 2016, Social Security gives only an average of $1,355 to retired workers. Social Security may finance some of your living expenses after retirement, but it should only be supplemental. Don’t expect for Social Security to fund your day-to-day expenses, as chances are, it won’t be enough.Retirees who largely rely on Social Security will find it challenging to manage their expenses, especially with the expected rise on health care costs and health insurance after they retire.
Along the lines of health care, Fidelity estimates that retired couples may shell out north of $260,000 on health care alone for the rest of their retired lives. Outside Medicare, retirees need to have money for trips of the ER, uncovered hospitalization and medication and other out-of-the-pocket medical needs. And if health care is predicted to be more expensive in the years to come, all the more reason why we should save more for our retirement.
Lastly, in a study conducted by Bankrate, it was found out that only 25% of the surveyed respondents plan to stop working after hitting retirement age. This means that many people expect to continue working or perform income-generating activities in their 60s, 70s and 80s. While consultancy and volunteerism are good reasons to be continually active at the workforce, many of the respondents cite income as the main motivator for working.
Importance of Saving for Retirement
Another important finding revealed in studies related to retirement is that one-fourth of the employees are not taking advantage of retirement package in their workplace. Dubbed popularly as free money, many employees are missing out an average of $1,366 annually in savings annually, an amount that could potentially boost their retirement savings.
But why is it important to save for retirement?
First, you want to become financially independent in your golden years. With a solid nest egg to your name, you won’t have to rely on grown up children to finance your needs in retirement. Instead, you can take care of yourself and avail the necessary services required for a comfortable retirement. Whether you’re looking to downsize, transfer to a senior community or do a lot of traveling in your retirement, you will be able to do any or all of them without the financial struggle.
Second, you wouldn’t have to depend largely on Social Security to finance your retirement needs. You are entitled by law to receive Social Security upon retirement, but it should only replace up 40% of your pre-retirement income. The rest should come from your own savings and investment portfolio.
Lastly, you get to live a retired lifestyle with no financial stress and worries. If you’ve saved up a solid amount for retirement, you will be able to afford medication, basic needs and luxuries without relying on social welfare or family. You get to make your own decisions and not be under the mercy of the government.
Saving for retirement is an important fact of life, but unfortunately, many people are ill-prepared for it. Those who don’t anticipate their financial needs after their career lives face the possibility of being dependent on social welfare for basic needs or being forced into working again. On top of the basic needs, older people tend to have more health concerns which may not be adequately covered by government-sponsored health insurance.
If you want to retire to a peaceful, comfortable and financially-stable life, you need to act now. Delay it further and you lose some money that would have help in financing your dream retirement.
Steps to Preparing for Retirement
We will all come at the point of retirement. The kind of life you live in retirement will depend on how you planned for it. It’s not too late to take stock of your retirement savings and make the most of your golden years with more freedom and happiness, and less stress.
To get you started with retirement preparations, consider following these steps.
1. Start Saving Early
The earlier you start saving money for retirement, the better. In fact, with the power of compounding interest, saving $1000 each year since you were 25 years old could grow around $213,000 when you reach 65 (assuming 7% annual growth rate). If you started a decade later, you lose more than half of this amount.
Your life will be different after retirement. You won’t have to spend money on raising kids, you’re probably going to be mortgage-free by then and some expenses will disappear or reduce, like gym membership, eating out and shopping. Still, you have to save early and save what you can because many things can happen from now until retirement and a solid financial backing will help keep things in check and in order.
Additionally, saving early works increases your potential retirement income over the years. This is especially true if you place your savings in non-traditional investment vehicles which grows with interest over time. Therefore, if you’re eyeing a certain amount on retirement savings many years from now, you need to get started with saving as soon as possible.
But how should one save for retirement? At this point, you probably still has a house and car to pay, the kids are still going to school and goods and commodities are are getting even more expensive. Because of these reasons, many people don’t make saving for retirement a priority.
Make saving for retirement a part of your expenses, like a debt you want to pay off. You don’t have to start big, but settle with what you can afford right now. You have to be happy and find purpose in saving for retirement and not feel like its a chore and useless act. Progressively, increase your savings as you eliminate some of your expenses. Perhaps, double or triple that starting amount when you’ve finally paid off your car or when you get a huge bonus at work. The most important thing is that you earmark a portion of your income today to use for retirement later on.
2. Live On a Budget
If you don’t live on a budget today, you will not have money to budget for in retirement. Alongside saving, budgeting is an important habit to ensure that retirement gets its fair share of allocation from each paycheck.
First, run the numbers on how much you’ll likely to need to have in retirement. Consider the rate of inflation, expected costs of medical care and commodities. Also consider the type of lifestyle you’ll want to live. With a budget for retirement in mind, you’ll be able to tuck away some money month after month, year after year for your retirement.
Envision what your day-to-day expenses would be like when you retire. You might not incur certain expenses pre-retirement like a mortgage or car loan, but you’ll probably take up some new expenses too, like health care and travel. Take them into account and imagine how much you’re likely to spend for them in the years after you retire.
People who are serious about saving for retirement also go the extra mile in saving for retirement. If you want to settle with a larger amount or playing catch up for all the years you’ve missed out on saving, you have to take drastic and aggressive action. Consider giving up or lessen the frequency of certain pleasures like shopping, eating out, cable and magazine subscription and throw that money towards retirement instead.
Apart from cutting back, consider adding more income today so you wouldn’t have to work in retirement. Make sure to throw some portion of your bonuses, earnings from second job, inheritance and other forms of unexpectedly large sum of money towards retirement.
The main problem with retirees suddenly earning a huge sum from pension and social security is that they get too excited about not having to work yet having all these money to spend. This results to spending more than too much and running out of money too soon. With a budget, you’ll be more on track with your spending and ensure that money will last long enough while you need it.
3. Pay Off Debts
When your old and retired, debts should be the least of your concern. As a matter of fact, debts may hinder you from living the retired lifestyle you so desire.
With income coming from your retirement savings, pension and other investments, it is safe to expect that it wouldn’t be as large or lucrative when you were working. Debt will eat up a portion of your retired income, money that would have been useful for things you enjoy in your golden age.
A couple of years before retirement, strive to settle down all your debts, including credit card debts, personal loans and other forms of consumer debts. You don’t want to use your pension money to clear off some or all of your debts. Withdrawing early charges you a hefty penalty, so it’s better to clear your debts off while your earning a steady stream of income.
4. Know Your Retirement Needs
How you intend to live your retired life will dictate how much you’ll need to save up. If you’re not sure what kind of retirement you’ll live, consider the following questions:
- Will you still go back to work and earn some income or quit working altogether?
- Will you still live in your home, move out to a senior’s village (or similar facilities), downsize to a smaller home or live with family?
- Will you be spending on travel and other luxuries?
- Do you have a health condition that may prompt out-of-the-pocket spending?
Experts say that you will need around 70-80% of your income pre-retirement to live the same lifestyle once you retire. Your retirement income will then compose of pension, retirement savings and social security pay-outs.
Once you get the amount you need survive and thrive in your retirement, you now need to consider if this will be enough to finance your needs for the next several years after you retire. The looming question now becomes: will you be able to afford retirement?
Assuming that you’ll retire at the average age of 63 and has managed to saved up $1,100,00 for retirement. Now that retirees are living longer, healthier lives, it is safe to assume that you’ll live for three more decades. Withdraw 5% of your savings or use approximately $5,000 a month and you should manage to finance retirement for the next 30 years seamlessly. That’s assuming that your savings will grow at a rate of 6% with inflation at the rate of 2%.
The thing is, many people know they’ll need money in retirement but they don’t save money while they can. This problem will not manifest itself today while you’re still earning, but when you’re old, retired and not as healthy as you used to be. Consider and make it a goal to save for retirement now, while you still have the income and energy to do so.
5. Get a Job With a 401k
One of the best ways to ensure your retirement savings is to pick a job with a 401(K) package. This is a retirement plan offered by many employers and typically allows employees to match the maximum allowed retirement contribution.
Many people call the 401(K) as “free money” because the contributions are made before taxes are imposed on your paychecks. Matching the contribution means you can contribute as much as the employer offers and your paycheck will be automatically deducted with such amount.
The contribution is considered as an investment which is typically spread towards money markets, stocks and bonds. The best thing is, you get to control how it is invested. So unlike doing a regular savings, the money invested in this package grows more rapidly and exponentially. In fact, those who are looking for their first jobs must always make this package a priority as it automatically put them one foot forward in retirement planning.
So how much can you save in the 401(K)?
It depends on how much your employer allows and your age. But the law says that you can contribute up to $18,000 plus $6,000 more if you are 50 years old and above. Alternatively, you may invest in a ROTH or Traditional IRA which allows you contribute $5,500 each year .
Some employers wait until their employees have worked for them for at least a year before enrollment into the 401(K) takes into effect. When you retire, you may get benefits from the 401(K) in the form of annuity or as a lump sum. However, make sure not to withdraw from the plan before retirement or else suffer from a 10% penalty tax, which can be hefty.
Wait until later to let the investment grow with compounding interest, plus enjoy tax benefits and tax deferrals.
6. Understand Basic Investment Principles
The goal of retirement investment is to produce profit from a diversified investment portfolio so that you are better protected against market fluctuations. An effectively managed investment also finances your retirement through passive income for the long-term.
Capitalize in financial knowledge in order to make the best and soundest decisions when it comes to your investments. Not only do the figures matter, but also how you plan to invest. There’s a wide range of options out there, ranging from stocks and bond; annuities, mutual funds, and rental real estate. Ideally, you should have diverse investment portfolio to get better leverage against the fluctuations and reduce the risks.
It’s also best to get to know better your desired investment vehicles and determine its risks and characteristics. All investments come with a risk, but some of them have smaller risks, while others come bigger ones. Are you a risk-taker with a huge amount of money to spare for investment right now? Or would you want to invest the minimum amount just yet and see how it goes?
Also consider the time frame of your investments. In case of investing for retirement, if you start in your 20s, you naturally need to pick a long-term investment. Real estate for instance, may demand a good amount of cash, it will soon pay itself off and give you passive income in your golden years. Index mutual funds are also great investments for low-risk takers as they don’t require much capital, they come with low fees and are quite flexible.
And to further give you protection against risks, you need to add in some safe types of investments as well. These are investments that more or less stay the same over the course of time, but still gives you a good buffer in case of the unexpected. Although often considered as savings, emergency funds are good example of such safe investment.
Read books, attend seminars and enrich your knowledge so you are better-equipped to land the best options. Don’t be in a rush to join an investment without studying it first, else lose a good amount of money over poor decisions. If required, hire the services of a financial expert so that you see things from an objective perspective, and hopefully help you reduce risks and improve returns.
7. Don’t Touch Your Retirement Fund
So you have a hefty retirement fund sitting right there and you just found out that there’s a leak on the roof. Also, you’ve really been lusting on that new Lexus your neighbor just drove past your home. And you know you have the money to use for basically any need or luxury. The only problem was, that money was meant for retirement.
You wouldn’t want to touch your retirement fund for little financial nuances or even a big-time luxury like the Lexus just yet. You want to let it sit there where it accumulates interests upon interests and by the time you retire, you would have a desirable amount to live with. And because unexpected things are well, to be expected, you need to set aside a certain amount for them too and leave your retirement fund out.
Why won’t/can’t you touch your retirement fund when it’s your money after all? You’ve worked so hard over the years just to grow that fund, and now that you want or need some extra cash, your retirement fund should be the last thing you resort to.
If you take out some or all of your retirement fund prematurely, you’ll be charged a 10% penalty tax. And if you even try to withdraw from the traditional retirement fund, you’ll also get a tax penalty of 25% and you lose some of your tax credits and deductions.
If you ever feel the need to free up some cash for something urgent, consider building and maintaining an emergency fund you can use in the course of your career. You could even sell some of your assets or take a loan. You just don’t want to touch your retirement fund for anything else, except your retirement.
8. Learn About Your Social Security Benefits
You’ve contributed to Social Security all throughout your working years so it only makes sense to get something back, right? Unfortunately, a good amount retirees have not saved enough and only rely on Social Security for their retirement needs. It should be noted though that Social Security is not meant to replace your entire pre-retirement paycheck; it’s only meant to supply a portion of it.
Still getting some cash whether from month to month or as a lump sum can still be useful when you finally hit retirement. However, you need to learn a couple of things about the system in order to take full advantage of it.
And perhaps the greatest concern when it comes to Social Security payouts is when you must begin taking them.
According to Social Security, you can begin collecting your benefits as early as 62 years old. However, the amount you receive monthly will be reduced permanently by 75%. It is best to put off the collection until you’re in full retirement age, which ranges between 65-67 depending on your birth year. If you were born in 1937, your full retirement age would be 65 and you’ll most likely to receive 100% of your benefits by then.
Social Security is designed to give you monthly benefits throughout your retirement age. And if you wish to establish a solid retirement income, you need to strive for the largest payout, and this is only possible if you collect your benefits later, rather than sooner.
9. Learn About Medicare / Your Medical Needs
Not many of us are keen seeing our doctors upon retirement, or at any point of our lives, but it’s often a necessity to live a healthy life. As you age, your health declines as well, and you may need more medical coverage before and after you reach retirement. And for all of us, we’re better off knowing what our medical and health care options are before a fatal virus hit.
Fortunately, retirees have Medicare coverage to at least off set some of the potential medical bills. Medicare is available for all individuals in their retirement, but if you plan to retire early, you need to figure out how to sustain your medical needs until Medicare becomes available to you.
Medicare is composed of many parts. Part A is hospitalization insurance and it’s free for most retired individuals. Part B is for medical insurance covering services and medication for treatment and prevention of a medical condition. But unlike Part A, this one needs to be paid out monthly.
Then there’s part C and D that provides more coverage which include coverage for prescription drugs, hearing, dental and vision needs. These parts of the Medicare need to be purchased separately.
To begin assessing how much coverage you need in retirement, you need to visit your health care provider. Get an overall health examination to determine your condition, and consequently, decide on which coverage is best for you.
It’s good to have a health and medical insurance in place, but you wouldn’t be too happy to use it. Instead of relying on the insurance, strive to maintain a healthy body by eating, exercising and sleeping right. It’s all in the lifestyle. Then regularly visit your health care provider for good measure.
We must understand that Medicare and other forms of insurance do not always give exclusive coverage, so it’s best to invest in healthy habits (it’s free) and prepare for possible out-of-the-pocket expenses to minimize the stress.
Ah, retirement, what a great word to say and hear. You can finally leave office work behind and tend to your garden, go golfing or keep traveling. While being fully retired from your clockwork of duties can be liberating, but it also triggers some stress and worries. This is especially true if you haven’t prepared for retirement as best as you can.
While it’s never too late to plan for retirement, it would be best to do it as soon as possible. You want the magic of time to work its compounding the interests in your retirement investments. Plus, you want to get a good head start in establishing your soon to be passive income.
But above all else, you want to retire in style, comfort and security and this can only be achieved through careful planning. No matter how frugal or grand you want your retired life to be, you need to begin drawing the plans as early as now to make things happen.
And remember, if you make certain sacrifices today, you will enjoy the rewards in the future.
Cary Silverman is a consummate entrepreneur having sold multiple companies during his 20 years of business experience in the financial industry, but for him, it isn’t about the money. His success is rooted in his passion to focus on doing something better today than it was done yesterday. These days, he’s the CEO of Waldo General, Inc. that oversees the operation of King of Kash.