Your Retirement Planning Guide For Right Now

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The sooner you start planning for retirement, the better chance you have of retiring the way you want. This is true whether you are 25 or 50. That’s why the best time to start retirement planning is always immediately – because tomorrow is not an option.

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Many questions arise as you work through the retirement planning process. One big take: How much savings do I need to retire? Let’s figure out how to answer that question to help you create a solid plan to reach your goal.

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1. Decide How Much Income You’ll Need in Retirement

To figure out your target retirement savings, you first need to know how much income you’ll need in retirement. The simplest way to estimate your target income is to adjust your current living expenses according to any changes in retirement. Some common changes to consider are:

  • Paying off your mortgage or other debts.
  • move or decrease.
  • No longer paying FICA taxes, which are levied only on earned income. For most people, the FICA tax rate is 7.65%. Withdrawals from your 401(k) and traditional IRA will be subject to ordinary income tax, but not FICA tax. Your Social Security income is also taxable.
  • Elimination of retirement account contributions.
  • Reduce transportation costs if you don’t want to go to work.
  • Higher transportation costs if you plan to travel in retirement.
  • Converting employer-sponsored healthcare to a Medicare plan. for reference, a report The Center for Retirement Research at Boston College concluded that the average retiree spent nearly $4,300 on out-of-pocket health care spending in 2018.

Most of these changes will reduce your living expenses in retirement. So financial advisor Often recommend planning a retirement budget that is 80% of your working income. If you make $80,000 today, for example, your target retirement income would be $64,000.

You can jump right in on that easy 80% count, but resist that urge. This target income number drives the rest of your retirement planning, and you want it to be as accurate as possible. For the best end result, take the time to crunch your own numbers.

2. Check Your Required Social Security

Social Security generates an average of about $20,000 annually in retirement income. If you and your spouse qualify for federal retirement benefits, you can earn $40,000 or more annually as a couple. This is a huge number that should not be overlooked in your retirement planning.

To estimate your retirement benefits at any age, create an account here my social security, Once you log in, you’ll see your current benefit estimates at different claiming ages. When you claim at a young age, your benefit is less. Delay your benefits and income is high.

The Social Security benefit estimator assumes that you will continue to earn your current salary until you retire. You can adjust this number and rework your profit estimates. However, you might not want to do that – even if you get a pay increase every year.

Your annual increases in this calculation only matter if they outweigh inflation. If you expect to earn a salary increase on that track with inflation, it’s fair to assume that your salary will remain stable until you retire. In this scenario, the dollar amount of your income may increase, but your purchasing power will remain the same. Since your benefit estimates are in today’s dollars, they are only accurate if you keep the salary estimates in today’s dollars as well.

Accounting for future changes to Social Security

There’s another tricky part about estimating your retirement benefits. latest estimate There appears to be a lack of funding on the horizon from the Social Security and Medicare Board of Trustees. that lack Could impact benefits starting mid-2030s, Should these estimates prove correct and legislators don’t implement the reform, Social Security recipients could see their benefits drop by about 20%.

The result would be disastrous for the millions of senior citizens whose federal retirement benefits are their primary source of income. So it is hard to imagine that legislators would allow this to happen. Still, you need your retirement planning to be conservative and realistic. In that vein, you can discount your expected profit by 15% or 20% – just in case.

3. Set a Retirement Savings Goal

Once you know your target retirement income and expected Social Security, you can estimate the required income from your savings. Let’s say you’re aiming for $64,000 in total annual retirement income. And you have conservatively estimated your federal retirement benefit at $20,000. This leaves a gap of $44,000 that you’ll fill with income from savings.

You can achieve that $44,000 income goal by a . can change into Savings Target with quick calculations. Simply divide your income target by 0.04. This number, 4%, is the safe withdrawal rate from your retirement account. When you divide your target income by 4%, you’re calculating the savings that will support that withdrawal rate. In our example, you would need $1.1 million to withdraw $44,000 annually.

Depending on your investment outlook, it may be appropriate to adjust that 4% withdrawal rate up or down. Doing so will change your target savings balance. It’s a conversation to be had with a financial advisorwho can recommend the appropriate withdrawal rate for your situation.

4. Create a Retirement Investment Plan

The basis of your retirement plan defines how you will save and invest to build up the money you need. If you don’t have a financial advisor or investment expert to guide you, you’ll want to feel comfortable using a compound interest calculator or savings goal calculator. hence, Given the correct variables, the calculator estimates the monthly investment needed to reach your goal.

Estimating your investment growth rate

All compound interest calculators will ask you to provide the expected growth rate. It’s difficult, because you can’t predict how the stock market will behave in the next year or five years. If your time frame is 10 years or more, however, you can count on the market’s long-term average growth rate, net of inflation. This rate is around 7%.

You can expect to earn about 7% annually on average if:

  • You are planning to invest primarily in low-fee equity index funds.
  • You are investing in tax-advantaged retirement accounts such as a traditional IRA, Roth IRA, or 401(k). These accounts defer your annual taxes on earned interest, dividends and capital gains.
  • Your account fee in an IRA or 401(k) is minimal.

If your investing approach involves moderate to heavy exposure to bonds versus equities, however, you would expect lower growth rates. The same is true if your index or mutual fund and/or your 401(k) charge 1% or more of the annual fee.

Estimating your monthly investment

Here is a scenario to estimate the monthly investment required to reach your savings goal. We say:

  • You have 30 years till your scheduled retirement date.
  • You are investing in a 401(k) with low-fee funds.
  • Since you have a long time horizon, you decide to invest aggressively. Your target portfolio structure is 90% in an S&P 500 index fund and 10% in a US Treasury bond fund.
  • You expect your growth rate to average 6.5%.
  • You want to deposit $1.1 million.

Using those numbers, your calculator will tell you to invest approximately $1,060 monthly to reach your goal. That value is within your annual 401(k) contribution limit. And, the money doesn’t have to come completely out of your pocket — your employer match could be billowing some.

Addressing an unrealistic monthly investment

It is possible that the monthly investment required to reach your savings goal is more than your budget allows. In that case, start investing immediately whatever amount you can afford. The money you invest today has a higher growth potential than the money you invest tomorrow.

Then, reconsider your plan. This is another area where an experienced financial advisor or planner can help you identify the best course of action. You can either increase your income, reduce your living expenses, or delay retirement by:

  1. Increase your income. Get a promotion, start a side hustle, or choose a part-time job. Use the extra money you earn to save more in your retirement account.
  2. Lower your living expenses. Pay off debt, spend less on discretionary purchases, shop for cheap insurance, switch to a no-fee, cash-back credit card that you pay monthly. You can even make your home or your car smaller. Use the savings to increase your retirement contributions.
  3. delay in retirement. Delaying retirement gives you more time to make retirement contributions. It also earns you a higher Social Security benefit. The drawback is that you end up with fewer years to enjoy your retirement.

5. Funds earmarked for Healthcare

Even if you are very healthy today, you are likely to see higher health care costs in retirement. You should address those costs in your projected retirement budget, but you can also earmark health care funds in your investment accounts.

Investing in a health savings account or HSA is a good strategy if you are eligible. If you have a high-deductible health plan (HDHP), you can make pretax contributions to an HSA. Your benefits administrator or insurance representative can verify whether your plan qualifies as an HDHP.

HSAs work like 401(k)s. In both accounts, you contribute pretax money, invest it, and your investment income is tax-deferred. However, your HSA allows tax-free withdrawals to cover qualified medical costs at any age. You can use those withdrawals to fund your payments, coinsurance, and certain supplies such as eyeglasses and contact lenses. Pay for…

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