Twenty years may seem like a long time from now, but it's not much time in terms of retirement planning. Why? Because saving for retirement isn't something you can do at the last minute, although many Americans are doing just that.
Roughly half (45%) of baby boomers have nothing at all saved for retirement, according to a survey from the Insured Retirement Institute, and a third of workers who have chosen to postpone retirement say they did so because they didn't have enough savings.
The earlier you begin saving for retirement, the easier it is to save enough. But it's still important to give your savings a checkup every so often to make sure you're on the right track. By the time you're 20 years from retirement, there are a few things you should be doing to ensure you'll be ready to retire on time.
1. Double-check your retirement number
Your retirement number is the amount you'll need to save by the time you retire. If you've already calculated it in the past, that's a great start. But it's important to revisit this calculation every so often in case your number has changed.
Two key factors that impact your retirement number are the amount you expect to spend each year in retirement and the number of years you expect retirement to last. If either of those change significantly, it could dramatically alter how much you need to save.
One easy way to get a rough estimate of your retirement number is to use a retirement calculator. Be as accurate as you can when inputting your information. If you simply guess at your numbers, you may not get an accurate answer.
For example, instead of simply assuming you'll need around 80% of your pre-retirement income once you retire, create a rough retirement budget to see how your future expenses compare to your current expenses. If, after creating your budget, you find that your retirement expenses are higher than you expected them to be, you still have time to adjust your retirement number accordingly.
Similarly, seriously consider how much time you expect to spend in retirement. While nobody can predict exactly how long they'll live, a third of today's 65 year olds can expect to live until at least age 90, according to the Social Security Administration. So if your family has a history of living into their 90s or beyond, you might need to save more to enjoy an extra-long retirement.
2. Determine how much you'll be receiving in Social Security benefits
Social Security benefits aren't designed to replace your retirement income, but they can help cushion your income so you don't have to save so much on your own. The key, however, is to figure out how much you can expect to receive.
To determine your estimated basic benefit amount, check your Social Security statements by creating a mySocialSecurity account. From there, you'll be able to see your earnings, as well as how much you can expect to receive in benefits based on those earnings.
Keep in mind that exactly how much you receive in benefits depends on what age you claim them. To receive the full benefit amount on your statements, you'll need to claim at your full retirement age (FRA), which is either age 66, 67, or somewhere in between. While you can claim as early as age 62, your benefits will be reduced by up to 30%. If you wait until beyond your FRA to claim (up until age 70), you'll receive extra money each month on top of your FRA amount.
Once you know how much you're expected to receive in benefits, you can adjust the amount you need to save. Say, for instance, you expect to receive $1,500 per month if you claim at your FRA. That comes out to $18,000 per year. Let's say you also expect to need $50,000 per year in retirement to cover all your expenses. If you're receiving $18,000 per year in Social Security benefits, that means only $32,000 per year needs to come from your personal savings.
3. Think about how taxes will impact your retirement savings
As you're checking in on your retirement savings, it's easy to fall into the trap of thinking that what you see in your account is what you get. But if you're stashing your cash in a 401(k) or traditional IRA, you're going to owe income taxes on your withdrawals. If you're going to be pinching pennies in retirement, you may or may not have enough to get by after taking taxes into consideration.
Retirement income taxes are no different than income taxes while you're working, except your income is whatever amount you withdraw from your retirement fund. Social Security benefits are also taxable, although exactly how much you'll pay in taxes depends on your total income.
A quick guideline to see how much tax you can expect to pay on your benefits is to add half your Social Security benefits plus all the rest of your yearly income to estimate what the Social Security Administration calls your "combined income." The amount you'll pay in taxes depends on your combined income:
|Percentage of Your Benefits Taxed||Combined Income for Individual Filers||Combined Income for Those Married Filing Jointly|
|0%||Less than $25,000 per year||Less than $32,000 per year|
|Up to 50%||$25,000 to $34,000 per year||$32,000 to $44,000 per year|
|Up to 85%||More than $34,000 per year||More than $44,000 per year|
So if between your Social Security benefits and your other retirement income you're earning more than $34,000 per year -- or $44,000 for married beneficiaries -- you can expect to pay taxes on up to 85% of your benefits. The only way to avoid paying taxes on your benefits is if you're earning less than $25,000 (or $32,000 for couples) per year.
On top of paying Social Security taxes, you may also have to pay income taxes on the rest of your retirement income (assuming you're withdrawing your cash from a 401(k) or traditional IRA). If you're withdrawing roughly the same amount in retirement as you were earning before you retired, you'll likely be in the same tax bracket, so your taxes won't differ too dramatically from what you're used to. But if you expect to be spending a lot more in retirement than during your working years, you could be hit with a bigger tax bill.
Planning for retirement takes decades, and the earlier you get started, the easier it is to prepare. But saving for retirement isn't a "set it and forget it" situation. By checking in on your retirement plan when you still have a couple of decades left to save, you can make adjustments and ensure you're on the right path.