One disturbing statistic revealed in the Federal Reserve's "Report on the Economic Well-Being of U.S. Households" is that nearly half of Americans have not done much financial planning for their retirement. Specifically, 24% of respondents reported doing "very little" planning and another 25% said they had done no planning at all.
If you are among this 49%, there's no better time than now to get started. Here are some steps you can take right now to get the ball rolling.
Figure out where you stand
If you have little or no retirement savings of your own, this part is easy. You'll just need to figure out how much income in retirement you can expect from other sources.
Social Security is (as of now) the universal source of retirement income, and you can get a rough estimate of what to expect on the Social Security Administration's website. There might be significant changes in the program between now and when you retire, so it's a good idea to pay attention to any Social Security-related headlines in the news.
And if you have any retirement plan, such as a pension or 401(k) from your employer, you need to account for that as well. Pensions usually clearly define how much income you can expect in retirement, and most 401(k)-type plans offer some kind of benefit-forecasting tool you can use to estimate how much you can expect to get each year in retirement. If not, there are online calculators to help you estimate your 401(k) income in retirement.
Determine what you'll need
As a general rule, experts say you'll need about 80% of your pre-retirement income to sustain your lifestyle in retirement. This is not a set-in-stone rule, and your actual income needs might be greater or smaller, but it's a good place to start.
So, if you make $100,000 per year right before you retire, you should plan to need about $80,000 per year from all of your retirement sources, including Social Security, any employer-sponsored plan, and your own savings and investments.
If you're still quite a long way from retirement, it can be impossible to predict what your salary might be then, but it might be a good idea to do a little research (Salary.com is a good place to start) to see how much people in your position make after a given number of years in the field. And if there's a good chance you'll be promoted or change job titles, factor that in, too.
A pretty decent guideline is to take your current salary and add 3% per year (i.e., multiply it by 1.03) for every year you plan to keep working. This 3% increase accounts for cost-of-living increases and annual raises. Of course, you can adjust this upward or downward as you see fit. You don't need to be too precise here; you simply want to get a good idea of what you'll need.
So how much do you need?
According to the often-cited "4% rule" of retirement, you can reasonably expect your money to outlive you if you withdraw 4% of your retirement savings during the first year and then adjust upward for inflation in subsequent years. Like the 80% figure I quoted for income, this isn't a one-size-fits-all number, but it's a pretty good place to start.
If you have a good idea of your income needs in retirement, take that number and subtract all other sources of retirement income. Then multiply the result by 25 to figure out how much you need to save personally in order to meet your income goal.
For example, if you need $80,000 per year once you retire, and you'll bring in about $15,000 from Social Security and $35,000 from a pension plan at work, then you'll need to make up a difference of $30,000 per year. Multiplying that by 25 reveals that you should aim for $750,000 in retirement savings in order to ensure a long, comfortable retirement. Here's a chart that shows how much you should aim for, based on your income requirements. Remember, this refers to income you need after you account for Social Security and any employer-sponsored retirement plans.
|Income You Need From Savings||Amount You Need To Save|
Get started now
If you don't have one already, now is an excellent time to open an individual retirement account, or IRA. These are tax-advantaged accounts specifically designed to help people save for retirement.
There are two basic types of IRAs: Roth and traditional. Both accounts allow you to contribute up to $5,500 per year in 2015 (or $6,500 if you're over age 50), and you can generally invest in any stocks, bonds, or mutual funds you choose. And most brokerages will allow you to open an account with no minimum balance requirement. You could literally get started for a few dollars.
The main difference between the two types of accounts is the tax benefit. A traditional IRA allows those who qualify to deduct their contributions from their current income. So, if you make $50,000 this year and put $3,000 in a traditional IRA, it could reduce your taxable income to $47,000 before you take any other deductions.
With a Roth IRA, you can't deduct your contributions, but any qualified withdrawals you make are tax-free. Plus, unlike with a traditional IRA, you are allowed to withdraw your original contributions (but not any gains on those contributions) at any time, which makes these accounts a good choice for people who don't necessarily want their money tied up.
Adjust your goals for your life
As I said before, there's no uniform approach to retirement savings. Some people can comfortably live on half of their pre-retirement income or less, while others may need almost 100% to feel comfortable and fulfilled in retirement. Some may benefit more from a Roth IRA, while others would be better off with the traditional variety.
Whatever your individual retirement goals may be, there's no better time than the present to get started. So take control of your financial future today.