Greetings! I trust that this finds you well and enjoying life.
Having a sound and structured process to save for retirement is so important. No matter where you are in the process the following thoughts should be helpful.
Although most of us recognize the importance of sound retirement planning, few of us embrace the nitty-gritty work involved. Here are some suggestions to help you get started with this important component of finance.
Determine Your Retirement Income Needs
Some experts suggest that you need anywhere from 60% to 90% of your current income to enable you to maintain your current standard of living in retirement. Use your current expenses as a starting point, but note that your expenses may change dramatically by the time you retire. Remember to take inflation into account. The average annual rate of inflation over the past 20 years has been approximately 2.4%. And keep in mind that your annual expenses may fluctuate throughout retirement. For instance, if you own a home and are paying a mortgage, your expenses will drop if the mortgage is paid off by the time you retire. Other expenses, such as health-related expenses, may increase in your later retirement years. A realistic estimate of your current expenses will tell you about how much annual income you’ll need to live comfortably.
Calculate the Gap
Once you have estimated your retirement income needs, take stock of your estimated future assets and income. These may come from Social Security, a retirement plan at work, a part-time job, and other sources. If estimates show that your future assets and income will fall short of what you need, the rest will have to come from additional personal retirement savings.
Figure out How Much You’ll Need to Save
By the time you retire, you’ll need a nest egg that will provide you with enough income to fill the gap left by your other income sources. But exactly how much is enough? The following questions may help you find the answer:
· At what age do you plan to retire? The younger you retire, the longer your retirement will be and the more money you’ll need to carry you through it.
· What kind of lifestyle do you hope to maintain during your retirement years?
· What is your life expectancy? The longer you live, the more years of retirement you’ll have to fund.
· What rate of growth can you expect from your savings now and during retirement? Be conservative when projecting rates of return.
· Do you expect to dip into your principal? if so, you may deplete your savings faster than if you just live off investment earnings. Build in a cushion to guard against these risks.
The next step is to put your savings plan into action. It’s never too early to get started. If possible, save more than you think, you’ll need to provide a cushion.
Use the Right Savings Tools
Employer-sponsored retirement plans like 401(k)s and 403(b)s are powerful savings tools. Your contributions come out of your salary as pre-tax contributions (reducing your current taxable income) and any investment earnings grow tax-deferred until withdrawn. IRAs also feature tax-deferred growth of earnings. Roth IRAs don’t permit tax-deductible contributions but allow you to make completely tax-free withdrawals under certain conditions. Annuities are generally funded with after-tax dollars, but their earnings grow tax-deferred (you pay tax on the portion of distributions that represents earnings). There is also no annual limit on contributions to an annuity.
First, contribute to employer-sponsored retirement plans at least enough to get a full company match. Then contribute to IRAs. Once you have maximized the IRS allowable limits to pretax accounts, annuities are a good next step because of their tax benefits.
If you have any questions about this information or feel that we can help in any way don’t hesitate to call.
Jeff Christian CFP, CRPC
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