Tips for Being Retirement Ready
It is a fact that less than half of American adults have calculated what they will need to save for retirement. In 2016, almost 30 percent of private industry workers with access to a defined contribution plan like a 401(k) did not participate in the program, even though experts say retired individuals will need 70 to 90 percent of their income to maintain the same standard of living when they stop working. It is also important to note that the average American should plan to spend about 20 years in retirement. Using a retirement calculator may help you determine how much is needed, based on many factors including your current age, household expenses and income, and years of retirement income.
One of the strategies for obtaining retirement security is the three-legged stool approach. This metaphor is a way of considering the three potential sources of retirement income: Social Security, retirement accounts, and personal savings.
● Social Security. It is unwise for the average American to rely on Social Security as their primary or only source of retirement income. Social Security replaces only 40 percent of an average worker’s wages, and by itself, 40 percent will not be enough to sustain a lifestyle. In the absence of other sources of income such as pensions or savings, it’s no surprise that many retired Americans are unable to maintain their current living standards, and many will end up living on the brink of poverty in the face of illness or loss of a spouse. It is important to explore your benefit projection, understand your overall entitlement, and make plans to protect your spouse in the case of your death.
● Private pensions and retirement savings plans. Retirement savings plans or employee pensions plans are the second leg of the retirement stool. Once a significant aspect of a well-designed retirement income package, pensions are quickly becoming a thing of the past. According to The Balance’s recent report, only 20 percent of Fortune 500 companies offered any defined benefit pension plan to their new hires at the end of 2015, and the number of employees covered overall was down considerably from the 60 percent who were covered back in 1998. Many employees may leave their places of employment before becoming vested in a company pension benefit.
The good news is that many employers do offer a 401(k) defined contribution retirement plan instead of pensions. A 401(k) is a deduction made from employee paychecks, but some employers do contribute to their workers’ retirement by offering incentive matches, which may range from 2 percent to up to 10 percent of what you save. In 2008, around 72 percent of employers had a match and found new and innovative ways to meet their fiduciary responsibilities to their employees.
● Individual savings. Because of the changing nature of employer-provided pensions and issues related to social security, it is imperative that American workers save on their own. Some are finding that a side hustle such as an ecommerce business can lead to cash not earmarked for bills. Whether it involves putting away extra income from an online tutoring gig into an emergency fund or hiring a financial planner to help alleviate the worry and stress of long-term financial planning, workers should be cognizant of their long-term retirement needs and plan accordingly.
Remember that saving for retirement involves some basic financial principles worth mentioning. Never touch your retirement account. Withdrawing your retirement savings now could mean losing principal, interest, or tax benefits or having to pay penalties. If you change careers, you can leave the savings invested in your current retirement plan or roll the retirement over into your new employer’s plan.
Even if you have all three legs of the stool, you can also open your own Individual Retirement Account (IRA). You can put up to $5,500 a year into an Individual Retirement Account, and you can contribute even more if you are 50 or older. IRAs also have tax advantages, but the treatment of your contributions and withdrawals will depend on whether you choose a Roth IRA or a traditional one. The value of your withdrawal after taxes depends on inflation and the type of IRA. IRAs can provide an easy way to save since you can set it up so that an amount is automatically deducted from your check.
How you save can be as important as how much you save. The type of investments you make play important roles in how much you will have saved at retirement. Learn how your savings or pension plan is invested and about its investment options. Diversify your portfolio by putting your savings in different types of investments.
What suggestions do you have for being retirement ready? Feel free to comment here.