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Planning for retirement is one of those things that people can't afford to put off, but often do.
In fact, one in three Americans have nothing saved for retirement, according to a NerdWallet survey. This poses problems with people living longer than ever. Over the last 60 years, the average number of years in retirement has grown from 15 to 20. The lengthening number of years people spend in retirement means a larger amount of money needs to be saved in order to live comfortably.
Along with a lengthening retirement, Social Security only covers about 40% of your pre-retirement income. That leaves a large gap between expected income and expected expenses.
But no matter whether you're just starting out at your first job or retirement is coming up soon, these three steps will get you on track to a comfortable retirement…
Planning for Retirement Step 1: Define What Retirement Looks Like
Not everyone's retirement looks the same. Figuring out when you want to retire and how you would like to spend your retirement will help you define how much money you will need to save.
According to a 2015 Fidelity Investments Couples Retirement Study, people should have at least eight times their last income before retirement saved when they retire as a quick easy number.
Last year, the U.S. median household income was $56,516. Eight times that is $452,128. Assuming both in a household are working, that's each person's figure at the median income. That means the couple needs to save at least $904,256 for retirement.
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If you are looking to retire at 65 and maintain your standard of living, saving eight times your income the last working year is probably sufficient. On the other hand, if you have goals like an early retirement and traveling the world, this number is a good starting point to add in the cost of the other things you want to do.
If you're married, discuss with your spouse what their goals are. Knowing what each person wants and expects in retirement will help ensure there is enough money at retirement and less fighting about goals in the future.
Figuring out what retirement looks like for you lets you make a plan to reach your goals…
Planning for Retirement Step 2: Develop an Investing Framework
Once you have the big picture figured out, it's time to start focusing on specific plans.
If you plan to move, change jobs, have a baby, or any other major life change, these need to be factored into how much and when you can save for retirement.
The other part of that is make sure you have a rainy day fund for the unexpected. Both will keep your retirement fund safe from unexpected expenses.
Early in your career, you will not be able to project expenses in retirement, but you can start saving. Figure out how much you can afford to save each paycheck. From there, create targets for increasing your contribution to your retirement plans.
For example, maybe 1% is all you can start investing for retirement. After you pay off your student loans, increase your contribution to 2%. Any time there is more money from either a raise or paying off debt, increase the amount you are saving for retirement until you reach your target contribution rate.
Your target contribution rate is how much you need to save every paycheck in order to ensure you are saving enough to meet your retirement goals. The general standard is at least 10% of your pretax income (including employer contributions). If you need help figuring out what your target contribution rate should be, talk to a financial advisor. They can help you determine the average expected rate of return on your money and how much you should save every month.
If you are within 10 years of retirement, you should be able to figure out a loose budget for retirement after adjusting for inflation. This will allow you to determine how much income you will need in retirement.
After you know your anticipated income needs, subtract out your estimated Social Security benefits to determine how much you will need to draw from savings every year.
For example, if you expect you annual expenses to be about $60,000 and Social Security benefits will be about $20,000 a year, the difference is $40,000. To make sure you have enough saved to draw that type of income every year, multiply your draw down amount by 12. In this case, you need $480,000 in order to have enough money in retirement.
The last part of making a plan is to make sure you know and have a strategy to deal with the things that will get in the way of a comfortable retirement. You can read about the five obstacles retirees will likely confront here.
After all the planning is finished, you are ready to start saving…
Planning for Retirement Step 3: The Best Savings Strategies
If your employer offers a 401(k), join it or maximize your allowed contribution if you're already in it. These contributions are taken pretax, which saves on your tax bill. Many also have a company match, where the company will contribute a certain percentage of your salary based on your contribution level.
If you don't have access to a 401(k), open an Individual Retirement Account (IRA). Deductions to an IRA are also pretax, up to a maximum of $17,500 per year.
If you reach the maximum in tax advantage retirement accounts, keep saving through other accounts. You can set up a brokerage account online to save additional money. This money will not have any tax breaks associated with it, but there will also be fewer rules for withdrawing that money.
Saving in an account outside of a designated retirement account is a must if you plan to retire before 65, since most retirement accounts have penalties for early withdraws.
No matter what your retirement goals are, it's important to start saving now.
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