Build a retirement strategy team
Ask your team for guidance
As you begin to define your retirement strategy, there are a number of resources that can help you. These include your employer, tax advisor, banker, home mortgage consultant, retirement planning expert, and an investment counselor. If you work for a company, a great place to start is by talking to your employer or your union. (If you’re self-employed, you can seek outside professional advice). Think of these individuals as your retirement strategy team. Take advantage of the information and advice they can offer you. Answers to these questions will help you determine how much longer you want and need to work (and save) to help ensure a financially secure retirement.
- Does the company offer a retirement plan?
- Does the company contribute to or match employee contributions to the plan?
- Does the company offer an automatic payroll deduction option so I can spread my contribution throughout the year?
- What other retirement benefits are offered?
Note: If your employer offers a retirement plan, contribute to it. If your employer contributes, keep in mind that their contributions can vary year to year, so check with your employer at the beginning of each year.
Your CPA or tax advisor
- Which retirement income sources should I spend first in order to minimize my taxes?
- At what age can I begin distributing money from my employer’s retirement plan or IRA without incurring the 10% additional tax? (Currently, the answer is age 59½. You avoid the 10% IRS additional tax on distributions from that qualified retirement plan if you leave the company in the year you turn age 55 or older [age 50 or older for certain public safety employees].)
Your financial advisor or investment professional
- How much can I realistically expect to earn on my investments? (Remember: investing always involves risk and there are no guarantees. Some investments carry more risk, and more potential reward, than others.)
- How should I allocate my assets to manage my income in retirement while seeking continued growth for my savings?
But be sure to check the credentials of any financial advisor you use. Make sure they have a solid track record and reputation. Remember: lots of good information is available about retirement planning at low or no-cost — in books, magazines, and on the internet — but if you do pay someone to advise or assist you, be sure you understand how (and how much) you’ll be charged. Some financial services companies will answer basic financial questions for free, or create a basic financial plan for as little as a few hundred dollars. Paying for that advice now can be a bargain if it helps you make smart financial choices that pay off in the long run.
The information contained herein is being provided as-is and without representation or warranty. The enclosed information is not intended as legal, tax or financial planning advice. Any discussion of tax or accounting matters herein (including any attachments) should not and may not be relied on by any recipient or reader. The recipient/reader should consult his/her tax adviser, legal consultant and/or accountant for a statement of tax and accounting rules applicable to his/her particular situation and for all other tax and accounting advice.
CREATE A RETIREMENT STRATEGY
Retiring with peace of mind and being able to take care of yourself financially is likely important to you. When it comes to creating a retirement strategy, there’s no such thing as “one size fits all.” Everyone’s circumstances and financial situation are a little different. How much money will you need in order to retire? Remember that various factors may change over the course of your retirement years so it makes sense to start preparing early.
The average life expectancy for American women is approximately 81 years old, and for men around 76; but you may live a lot longer. The length of your retirement may equal the number of years you were in the workforce, so you may need to plan for a retirement that lasts decades.
Consider where you may live and how your needs may change. Do you anticipate living with family members or on your own? Some senior communities now offer healthcare and assisted living as part of a complete package of services.
As you age, your state of health may change. You may develop new healthcare needs and have increased healthcare costs. During retirement, most people are vulnerable to rising costs in health care.
Start now, set goals, and stick to them.
The sooner you start saving, the more time your money has to grow. Put time on your side. Make retirement savings a high priority. Devise a plan, stick to it, and set goals for yourself. Remember, it’s never too early or too late to start saving. So start now, whatever your age!
Don’t touch your savings.
Don’t dip into your retirement savings. You’ll lose principal and interest, and you may be assessed an additional tax for early or pre 59 ½ distributions. If you change jobs, consider your options including rolling over your savings to an IRA or your new employer’s retirement plan.
Know your retirement needs.
Retirement is expensive. As a general guideline, many experts recommend that you aim for 75–85% of today’s income after you’re retired. Start by creating a projected budget to get a realistic sense of how your financial picture is likely to look after you retire. This will help you see how much you can afford to spend each month. It’s important to create a budget you can live with over time. To make your retirement budget work, many experts recommend that you pay off major debts, such as home mortgages and student loans. This can greatly reduce the amount of money you’ll need each month during retirement.
Learn about your retirement benefits from your employer.
Learn about and participate in your employer-sponsored retirement plan, pension, or profit-sharing. If you are eligible for a plan and matching funds, if at all possible contribute at least the amount of the match. By contributing at least the amount equal to your employer’s match you are maximizing your retirement savings. Otherwise, you are leaving free money on the table. Many employers help make saving easy by allowing automatic contributions through payroll deductions. Over time, compound interest and tax deferrals make a big difference in the amount you can accumulate. If you plan to change jobs, be sure to find out what will happen to your retirement savings. Be sure to find out what benefits you may have from previous employment.
Find out about Social Security.
Social Security pays the average retiree about 40% of pre-retirement earnings. Contact the Social Security Administration at 1-800-772-1213 or online, at www.socialsecurity.gov, for a free Social Security Statement and to find out more about your benefits.
Consider putting money into an IRA.
In 2020, you can contribute up to $6,000 into an Individual Retirement Account (IRA) or up to $7,000 if you are 50 or older, and gain tax advantages. When you open an IRA, you have two options — a traditional IRA or the Roth IRA. The tax treatment of your contributions and distributions will depend on which option you select.
Consider basic investment principles.
How you save can be as important as how much you save. Inflation and the type of investments you make play important roles in how much you’ll have saved at retirement. Know how your pension or savings plan is invested. Financial security and knowledge go hand in hand.
These tips point you in the right direction. But you’ll need more information. Talk to your employer, your bank, your union, or a financial advisor. Ask questions and make sure the answers make sense to you. Get practical advice and act now.
 US Department of Labor
BUILDING YOUR RETIREMENT SAVINGS
Make it automatic. Here are some tips for creating the retirement savings you want:
- Make savings a habit! Even if you’re still in school and only working part-time, and can start at just $50 a month, the amount you’re able to save is less important than making the commitment and sticking with it. Over time, you can always increase the amount you save, but you can’t make up for lost years of compound interest. So, while it can be tempting to use your retirement savings like you would emergency savings, it’s important to weigh the costs and potential penalties before acting.
- Make it automatic. If you set up automatic savings, you’re less likely to forget to put retirement savings aside. There are a couple of ways to set up automatic retirement savings. Consider transferring funds automatically from your paycheck to your retirement plan at work and setting up an automatic transfer from banking accounts to your IRA. This can help you save regularly with little hassle. A lot of retirement plans allow you to increase your savings by 1% a year automatically. This is called escalating savings and can be an effective way to grow savings by starting small.
- Pay yourself first – Many experts recommend that you pay yourself first or set aside money for savings when you receive income rather than waiting to see what’s left. Check your budget to determine how much you can save and consider saving as much as you can. Consider your living expenses and debts. Try to save from 10 to 20 percent of your income and use direct deposit or transfer into your retirement account.
- As soon as you start making money, start saving money! If your employer offers a sponsored retirement plan like a 401(k), 403(b), or governmental 457(b), enroll and make a contribution from each paycheck. An added benefit in participating is that many employers offer some kind of matching contributions to what you’re saving. This can provide a big boost to your savings.
- Many company retirement plan contributions are tax-deferred meaning you don’t pay takes when you contribute to your account. If your employer matches some or all of your contributions, take full advantage by funding at least the amount that is matched. Study your company’s plan. If you have a question about your employer-sponsored plan, talk with your HR department or a retirement plan expert.
- In addition to your company-sponsored plan, as long as you have earned income you can contribute to an IRA. A Traditional IRA offers tax-deferred growth potential. You pay no taxes on any investment earnings until you withdraw or “distribute” the money from your account, presumably in retirement. With a Roth IRA, your contributions aren’t tax-deferred, but your distributions in retirement can be tax-free, if certain conditions are met.
- Consider trade-offs and priorities. You may be trying to decide between paying off your loans on a faster schedule or putting the money into savings and investments. If you have low-interest student loans, you may earn more by giving priority to saving and investing. But if you have high-interest credit card debt, you may find it’s financially advantageous to pay your debt first and then focus on saving and investing. But remember, many people carry at least some debt for most of their lives. If you continue to put off saving until all your debts are paid, you may never start saving the money you need to retire.
- Be informed. Over the coming years, whether you manage your investments on your own or work with an investment professional, it’s important to be well-informed. Be proactive about gaining as much investing knowledge as you can from the Internet, books, magazines, and other sources. Consider your risk tolerance when deciding on a mix of conservative (lower risk, lower potential return) and more aggressive (higher risk, higher potential return) investments.
Planning for retirement: Early in your career
Make savings a habit. The amount you’re able to save is less important than making the commitment to save consistently.
Why start now
Like most people, you probably want to retire someday. That means having enough money in savings and retirement accounts to enjoy a comfortable lifestyle without having to work. You may think it’s too early to start, but financial experts agree that no one’s too young to save for retirement. In fact, the key to success is to start saving as early as you can.
Starting early allows you to accumulate more savings over a gradual period of time. In addition, the power of compound interest is increased the sooner you start to save. The longer you wait, the less time your savings has for earnings to grow.
Start saving for retirement
Let’s say you, Investor A, start investing at age 30 at a rate of $1,000 per year for 10 years and stopped. Your friend, Investor B (age 45), starts contributing $1,000 per year for 20 years. This example shows a total value for Investor A of $59,964 and a total value for Investor B of $38,993. The reason for all this is compound interest. When you put money into a retirement account, you don’t just earn interest on the money you contribute, but also on any interest earned over time. This way, your money grows faster than it would from your contributions alone. But this does take time.
The above graph is for illustrative purposes only. It depicts a hypothetical initial value of $1,000 in an IRA for two investors. The example assumes a 6% annual fixed rate of return and annual compounding. The growth of the assets is before tax and portions of distributions from the account will be taxed at an ordinary income rate at the time of withdrawal. The chart does not represent the returns of any particular investment and should be not be used to predict or project performance. There is no guarantee you will earn 6% on investments and your account value may fluctuate over time. It assumes all earnings are reinvested and does not include transaction costs, fees, or expenses associated with the account or any individual investment made in the account.
How much to contribute
When you’re just starting out and have bills and loans to pay, you may find it tough to make saving for retirement a priority. Saving regularly, even if the amounts are small, can yield big balances in the future.
The younger you are, the more time you have before retirement age. You may therefore be able to make some investments that have higher risk and higher potential reward compared to a person closer to retirement age who needs to be more conservative.
Try to save at least 10% -15% of your income annually to your retirement plan in order to have enough income during retirement. Be sure to find out how much your employer will match. You should strive to save at least what the matching contribution would be, if less than 10% of your income. Matching contributions can provide a valuable boost to your retirement savings.
Building your retirement savings in mid-life
Regularly check your progress toward your retirement goals, review your budget, and talk to your family members about their goals and concerns.
You may have given saving for retirement a lot of thought when you first joined the workforce, or when you were younger. Things may have changed for you since then. You may have more expenses and responsibilities now, and your financial picture may have changed. But a lot of the principles still apply.
- Work toward a goal of saving 10% – 15% of your salary for retirement.
- Make sure you have or are building an emergency fund that will support you for 6 – 9 months.
- Review your budget monthly and adjust for any changes, like new expenses that need to be accounted for.
Managing in the middle
You may also have some new things to deal with. At this stage in your life it’s important to find the right balance between your retirement goals, children’s education costs, and caring for aging loved ones.
Begin with your budget. Creating a written budget, also called a spending plan, can be a valuable tool for living within your means and setting aside the savings you’ll need to retire. A budget will help you to see your overall financial situation today and how much money you can potentially save and invest before you retire.
After making your budget, you may find that there’s not enough money to go around. What do you do then? Since your fixed expenses may be difficult to change, look for ways to decrease your flexible expenses (for example groceries and electric bills, and expenses that are discretionary (like clothes or home decorating). Also consider ways to increase your income.
Create a projected budget to get a realistic sense of how your financial picture is likely to look after you retire. This will help you see how much you can afford to spend each month and not outlive your retirement savings.
When you make your pre- and post-retirement budgets, try to be realistic. It’s important to create a budget you can live with over time. Review your budget periodically and adjust it as needed.
Talking with your family can help
Teach your kids good financial habits. Involve them in decision making when it comes to how much the family will contribute to their education needs.
Talk to your parents or other older relatives. Make sure you talk to them when everyone is well, and when there aren’t other stresses occurring (like during the holidays). Understand expectations of your family. Determine what you can realistically do for others while also managing current and future savings needs.
While it may be challenging to manage more expenses and responsibilities now. Keep saving. The principles remain the same and your consistency will help you reach your retirement goals.
Determine the money you’ll need
Use this calculator to estimate the savings you’ll need to enjoy the retirement lifestyle you want. Fill in the blanks; then click Submit. The Social Security Administration can provide an estimated benefit. For information about your pension, contact your HR office.
Click Reset to try different figures.
THE 4% RULE
Making your retirement savings last
Many studies indicate that if you want your retirement savings to last, you should withdraw no more than 3% to 4% of your savings each year. The exact percentage you’ll want to withdraw depends on many factors, including how long you live. Obviously no one has a crystal ball to see into the future, but if you’re in good health and retire at a relatively early age, withdrawing a smaller percentage each year will help ensure that your savings last as long as you do! The amount of savings that you spend each year will also depend on how much you receive from other sources of income such as part-time work, social security, etc. If your other sources of income are significant, you’ll have some flexibility about which pool of money you choose to spend — your savings or your other sources. As a guide, you can use the 4% rule to help estimate how much income you can withdraw from your savings each year. Circumstances may vary so be sure to look carefully at your individual plan.
To calculate the amount you need saved to retire:
- Determine your desired annual retirement income.
- Subtract your estimated annual income from pensions and military retirement pay.
- Subtract your estimated annual income from Social Security. Visit the Social Security website (ssa.gov) to review your statement and estimate your benefits.
- Divide the remainder by 0.04 if you are using a 4% withdrawal rate. (Or, divide by 0.03 if you are using a 3% withdrawal rate.)
Everyone’s retirement picture and goals are a little different. But hopefully this 4% rule gives you a good general guideline.
To decide how much money you’ll need to retire, you’ll need to consider your own retirement spending needs and your own sources of income.
A financial advisor can help you decide the best strategy for you. If you don’t expect to have much income other than your savings, you need to be more conservative with your withdrawal rate. If you’re still working now, try to save as much as you can at the best interest rate possible before it’s time to retire.
BUILDING YOUR RETIREMENT PAYCHECK
Retirement money: Five common sources
In retirement, you’ll live on money saved, received, earned, and invested. On average, the majority of your retirement income will likely come from your employer sponsored retirement plan, IRAs, other, and Social Security. But there are other ways to build your retirement check too:
For most people, retirement funds come from five sources:
The money you’ve saved, i.e. your retirement “nest egg.” Many experts recommend that working people try to set aside 10% -15% of what they earn into long-term savings. Your portfolio of investments might include stocks, mutual funds, bonds, etc.
- The amount you receive in Social Security will vary based on how much you earn, but for many retirees today, their Social Security benefits is about 40% of their income. Savings accrued in pension plans. Although pension plans were at their peak in 1985, recent data suggests 14% of employees have a pension plan. After you retire, you may add to your nest egg with money you receive, such as social security or a pension.
- Today there’s a lot of talk about social security and what’s going to happen to the program in the future. But whatever happens, the reality is that most people cannot rely on Social Security to fully fund their retirement years. For example, in 2019, the average monthly benefit nationwide was $1,471. That’s $17,652 a year, an amount that’s not likely to give you the retirement of your dreams.
- Not too many people are lucky enough to have a pension. Even when pension plans were at their peak in 1985, fewer than half of Americans working for private companies were covered. By one current estimate, only 14% of those employed outside of government agencies can expect to receive traditional pension checks in retirement.
You may earn more money by continuing to work. An AARP Survey found that 13% of people were working in retirement. Many “retired” people — if they can — continue to earn money by working part-time, running a small business, or cycling between periods of employment and leisure. In addition to the income, continuing to work helps many people to feel connected, useful, and satisfied with life.
Try to earn the highest rate of compound interest you can. You may take a portion of your savings and invest it. Investing means taking some risk with the goal of earning a higher return over time. If your employer offers a 401(k) plan, don’t miss out on the opportunity to participate. Take advantage of the “catch up” provision starting at age 50 to maximize the amount of money you contribute.
If you’re a homeowner, another source of retirement funds might be the home equity you have accumulated over the years. Equity is the difference between how much the house is worth and how much you still owe for it.
- If you have equity, you may be able to borrow money using your home as security. A home equity line of credit can provide you with financial flexibility and options before and after you retire. Just remember that as you use it, you’ll have to make monthly payments to your lender.
- Some retirees sell their home, downsize to a smaller and less expensive location, and add the profit they make to their retirement savings.
- Many financial experts recommend that — if you can — you pay off your mortgage by the time you’re ready to retire. This will not only take away any worry about making loan payments, it will also give you a good financial cushion in case you need the money for other needs or a financial emergency.
- In your retirement years, another way that homeownership might benefit you is a “reverse mortgage.” This is a loan designed in a way that’s the opposite of a traditional mortgage loan: instead of paying your lender, your lender pays you. Instead of building home equity, you reduce your home equity by withdrawing it as income. The ability to turn your equity into tax free income is what makes reverse mortgages appealing and valuable to many homeowners over the age of 62. You can use these cash advances from your home equity for any purpose you choose.