When you are planning for retirement, the financial focus and goals change through each phase of life. No matter where you are though, you should think long-term and consider the big picture. Here are items to consider.
Appreciate the major advantage of time. Money you save and invest today has more time for the interest it earns to compound. Interest is added back to your account and becomes part of your principal. With more principal, the account earns even more interest, which continually compounds into new principal. Use our Compounding Calculator to see how savings can grow.
If your employer has a 401(k) or other retirement program, take advantage of it. In particular, if your company will match what you save, not contributing means you are throwing away retirement dollars.
Contributions to a 401(k) are made before taxes, so your current taxable income is reduced. As this example shows, your take-home pay may not be affected as much as you think.
|401(k) contribution||6% = $1,800||0%|
|*25% tax bracket; married filing jointly.|
This person saves $1,800 in a 401(k) and pays $450 less in taxes. Take-home pay is about $26 less a week, but employee receives matching employer dollars and interest on $1,800 invested.
If you think you don’t have enough money left over after paying bills, now is a good time to set a budget, focus on paying off debt such as student loans and determine ways to reduce expenses. Are there items you can eliminate (a meal out, snacks, movie, etc.) to live on $26 less a week?
|Employee Contribution||Employer Contribution||Savings in 35 Years|
|6% of salary annually = $1,800||6% of salary annually = $1,800||$896,646|
This example assumes $30,000 salary, 3% annual salary increase, average 8% rate of return and 100% employer match. While current 401(k) rates are lower, our example takes into account historical numbers and a projected long-term average.
If your employer does not offer a retirement plan, you should consider other savings options, such as an Individual Retirement Account (IRA). Since you are young, you might consider putting your money in slightly riskier investments for a higher rate of return, since you have more time to recoup losses. A financial advisor is a professional who can meet with you to discuss your savings and investment options.
At this point in life, hopefully you are more established, with additional financial resources. However, you may also have greater financial responsibilities, which creates a challenge in balancing spending and saving. Don’t let expenses like a mortgage payment or the cost of raising children create the mindset of, “I’ll save for retirement later.” Continue following a budget and managing daily spending, as even small contributions to a retirement fund will earn interest, compound and grow.
Now is also a good time to begin thinking about longer-term goals. For example, if you have children, starting a college fund now can help you to avoid dipping into retirement savings later.
Retirement suddenly doesn’t seem so far away, and your focus starts to shift from saving to retirement income. Now is the time to ensure you will truly be able to cover anticipated expenses when you are no longer working. Think not only about the money you have saved, but also about other sources that may contribute such as Social Security benefits and Medicare. Learn about the various ways you will be able to convert employer retirement savings to a stream of income. Consider whether you should move to more conservative investments to preserve what you have saved. Meet with a financial advisor to begin thinking about post-retirement and making any needed adjustments. If you have managed to accumulate substantial wealth, you should consult with a wealth management professional.
After years of planning and saving, now is the time to make the most of your retirement money. Is the retirement income stream you planned covering expenses? Do you need to make adjustments to regular distributions? If you are in good health, do you have financial plans in place if your health begins to decline? Have you shared those plans with family members? Continue working with a financial professional to manage your retirement funds, so you can be certain the money you have saved will last your lifetime. . .and perhaps beyond for your family.
Retirement planning is definitely changing. Most people in the workforce today must fund their full retirement as opposed to receiving an employer pension, and the amount of money needed continues to increase. It’s important to start early, save continuously and adjust your plan through each phase of life.