Many young ad middle-age adults don’t worry much about retirement, perhaps thinking that their 66th birthday is still a long way off so they have several decades more to consider it.
They often put retirement planning and saving at the bottom of their important matters list (or exclude it all together), perhaps because they have many other matters to prioritize, like paying their debts, covering their daily expenses, or saving up for their kids’ education.
If you are among those who have not yet thought of preparing for when you will leave the workforce, or you want to save more in time for your retirement, then now is the opportunity to start acting on it.
Here are some insights that might get you started.
What the Numbers Show
Given that 46 percent of households in the United States would have a hard time even meeting emergency costs of $400, one can surmise that for many of them, retirement funds are at the bottom of their priority list.
In the Survey of Household Economics and Decision-making conducted in October and November of 2014, the Federal Reserve found that 31 percent of the 5,800 respondents (non-retirees) have neither pension nor retirement savings, and almost 25 percent of these were above 45 years old.
In another survey, GoBankingRates found that 33 percent of Americans have $0.00 in savings for their retirement.
According to the report on Time, the study shows that 42.2 percent of millennials (18 to 34 years old), 29.8 percent of Gen-Xers (35 to 54 years old), and 28 percent of Baby Boomers (55+ years old) don’t have money set aside for when they retire.
Of course, those in the younger generation have more time to save up for the future.
Why is planning for retirement important?
Retirement is not cheap so years before you reach your golden age, you should already be thinking of how you will support yourself when you no longer have a regular job.
Experts say that you would need 70 percent of your pre-retirement income to be able to maintain your current lifestyle, and that is if you are a high earner. If your income is rather low, then you would need somewhere around 90 percent.
One source that you might draw money from when you retire is your pension or retirement fund; two is your business, if you have one; and three is from other sources, like mutual funds or other investments. However, you need to remember that savings matters.
Ways to Prepare Yourself Financially for Retirement
There are many strategies that you can apply so you can have more money when you retire. Here are some of them:
Sit Down and Study Your Finances
The first thing you need to do before tackling financial matters, including your retirement funds, is to spend time writing down your current income and expenses. Here, you will be able to identify where your money goes, how you can cut down on your spending, as well as how you can start saving or increase it.
· Cut down on expenses
Once you’ve listed down your expenditures, try to see what you can shave off. For instance, you can think about downgrading or cutting some of your paid subscriptions or selling that other car that you don’t use much. You can also start walking or biking to nearby places or commuting instead of driving.
It would also be to your advantage if you drop some of your credit cards, keeping only one or two for when you really need them, and start paying in cash – after all, using plastic during shopping tends to make people spend more.
You might also look into refinancing your existing mortgage for lower interest rates.
· Increase your income
There are many ways to increase your income if you open your eyes to the possibilities and opportunities.
For instance, you can offer to do overtime at work if your employer allows it, or you can get a part-time job.
You may also want to consider home-based work or a small business based on your skills, such as taking projects as a freelance writer or transcriber, or perhaps making cupcakes that you can sell to your neighbors or officemates.
Adding income does not necessary mean adding to your workload, however. For instance, you might think about renting out an extra room in your house, setting up an online store, or even switching banks to one that offers better interest rates on your savings.
· Pay your debts
You also need to find ways to pay your loans, credit cards, and other debts as soon as possible. Getting out of these obligations will give you peace of mind and more freedom to handle your hard-earned money.
Also, don’t miss deadlines. Paying late results to additional fees that you can otherwise add to your savings. Moreover, don’t add more to what you already owe.
For instance, avoid using your credit cards as much as possible and resist offers for things that you don’t exactly need, like getting a second vehicle just because the new model seems like a bargain.
· Identify your retirement needs
You should also try to look ahead and identify how much you would need when you retire.
Whether you want to have a standard of living similar to the one you now have or you intend to have a simpler lifestyle, you should still calculate how much it would cost and how much you should be setting aside in order to meet that need.
You can make use of a retirement calculator like the one on CNN to see if you will have enough funds by the time you retire. The one on Kiplinger asks more specific questions so you can get a better assessment.
These include how much will be the remaining mortgage on your house when you retire and the expected amount you will receive from your Social Security pension, among others.
These computations are general estimates, though, and things could still change along the way, such as having to use some of your savings for emergency medical treatments or getting a hefty pay rise.
Many financial experts have, time and again, emphasized the importance of savings.
When you save, though, don’t think only about the down payment you intend to dish out for your dream house or how much you would need to travel next spring.
You should also think about your retirement. Surely, you would prefer to have a more relaxed life when you’re old and gray rather than spend your years constantly worrying about where you’re going to get money for your bills.
You need to save as much as you can as early as possible so you won’t outlive your finances. Also, rather than saving a bigger amount for a shorter period, you should consider saving early because, as time goes by, you will benefit from the compound interest.
Saving requires discipline, and you should instill that habit in yourself as soon as you can. Don’t think, however, that if you were not able to start early, that it’s already too late.
You can still start even when you’re in your middle-age years, but you may have to either stretch your budget further, work longer, or expect less by the time you retire.
Although the amount to save varies from person to person, the general guideline is to set aside 15 percent of your income.
Ask About Your Employer’s Retirement or Pension Plan
A study by the Schwartz Center for Economic Policy Analysis at the New School found that in 2011, 68 percent of working age individuals (between 25 and 64 years old) did not participate in an employer retirement plan, either because they opted not to, their employer did not have this type of plan, or they were not employed.
Rather than follow their example, you should start finding out if the company you work for offers a plan for retirement.
They may have a defined benefit plan or a defined contribution plan. There are differences between the two and it would help if you become familiar with them.
With the defined benefit plan, e.g., a traditional pension plan, the employee gets a guaranteed amount monthly upon retirement.
It tends to be more expensive for employers, however, and the investment risks fall on the shoulder of the provider. Thus, pensions are not as popular now as they once were.
If your employer still offers a traditional pension plan, ask if you are covered and find out what benefits you will be entitled to. Also find out what would happen if, for one reason or another, you need to resign and take another job.
With the defined contribution plan like a 401(k), there is no guarantee on either the minimum or maximum benefits and the investment risks are put on the employee.
To describe it briefly, your contributions may be placed in different investment products, which might include ETFs, mutual funds, stocks, and bonds. The options you can choose from would depend on what’s included in the plan but, basically, the value of your investment would depend on how well or how poorly the products in your portfolio performs.
Still, this gives you freedom to decide how much you want to contribute, up to a certain percentage of your wages.
Moreover, you get to manage your own portfolio and decide on where to allocate your funds based on your risk tolerance, i.e., stocks are riskier than cash and bonds.
These days, it is more likely that an employer would offer a 401(k). This is less risky for them and it is also more convenient for you, the employee, because you can keep on contributing even if you change jobs.
What’s more, some companies have a match program. This means that each time you put in some money into your account, your employer will also make a contribution. You should find out how much you should contribute so can get a full match.
Increase Your 401(k) Contribution
Regardless of how much or how little you earn, whether you’re on your first job or you’ve already been part of the workforce for years, you should start or increase your contribution to your 401(k) as much as you can. This is because:
· You can enjoy the benefit of deferred tax.
This means that taxes for your contribution are not deducted from your paycheck; rather, you’d pay the tax later when you withdraw money from your retirement fund.
· Your contributions have the potential to grow.
Your pre-tax money can accumulate compound interest, depending on what you invest in.
In many cases, though, such as with stocks and bonds in which you receive dividends and capital gains, you need to reinvest your earnings so your funds will keep on growing. Either way, relatively small returns would add up after a few decades.
· You could get more from your employer.
Meeting the contribution required by the company you work for could equate to a full match.
Let’s say your employer is offering to pay 50 percent of your contribution if you contribute $6 percent of your salary.
This means that if you are earning $60,000 a year and you invest $3,600 to your 401(k), then your employer adds $1,800 to your account. Not taking advantage of this would be like turning down money being given to you.
If you want to have a rough estimate on how much you’d have by the time you retire, then you can try using a 401(k) calculator, like the one on Calculator.net.
After inputting the details, like your annual salary and current 401(k) balance , you’d have an idea on how much money you can withdraw per month or per year upon retirement.
Have an Individual Retirement Account
In addition to your 401(k), it’s also wise to have an Individual Retirement Account. If you can reach the maximum annual contribution, you can enjoy its benefits when you retire.
The most known IRAs are the traditional and the Roth. According to Internal Revenue Service, for either or a combination of both, you can contribute up to $5,500 annually if you are younger than 50 years old and $6,500 if you are 50 years old or older.
· Traditional IRA
With the traditional IRA, your contributions may be partially or fully deductible, depending on your circumstances, and your earnings are not taxed until they are distributed. In other words, you get taxed when you make a withdrawal upon retirement. Also, you can no longer contribute regularly to this once you reach 70.5 years old.
· Roth IRA
With the Roth IRA, on the other hand, your contributions cannot be deducted, but if you meet the requirements, then your qualified distributions may be tax free.
Also, you can contribute even after you reach 70.5 years and leave money in your account for the rest of your life. And while your Roth IRA gets taxed immediately, at least you no longer have to worry about paying taxes for it when you retire. This means that the money you put into your account grows and earns and you can withdraw all that later without having to pay taxes anymore.
The Roth IRA has been highly recommended by many financial experts since taxes are unlikely to be lower in a few decades than they are now. You can think of it as enjoying the benefit of paying less taxes.
Also, you can withdraw your contributions (not interests earned) anytime, without taxes or penalties, although that wouldn’t be wise given that it’s supposed to be for your retirement.
However, there are income limits to the Roth IRA. Depending on your filing status, you won’t be allowed to contribute if you earn more than a certain income range.
For instance, if you are single and your modified adjusted gross income is less than $117,000, then you can contribute up to the limit; if its more than or equal to $117,000 but less than $132,000, then you can make a partial contribution; but if it’s more than or equal to $132,000, you won’t be allowed to contribute at all.
Learn More About Your Social Security Benefits
Many people dream of retiring early. This could be possible if you are financially secured, but if you are expecting to be partially funded by Social Security, then you may have to think twice about it. Early retirement often means that you will not get the full benefits that will you will otherwise receive if you retire at the required age.
On average, retirees get from Social Security about 40 percent of their pre-retirement earnings. You can use the Retirement Estimator at the agency’s website to calculate what benefits you can receive.
Have a Health Savings Account
Having a Health Savings Account means that you can have funds for your medical and health needs when you retire.
Your contributions are tax deductible from your gross income and if you use the money for qualified medical expenses, it is tax-free. Moreover, you can use the money for your retirement.
However, if you’re under 65 and you use your HAS funds for non-qualified medical expenses, then you will need to pay taxes based on your income tax rate. You will also have a tax penalty of 20 percent.
The contribution limit is $3,350 for single individuals below 55 and $6,750 for families. For those aged 55 and older, they can add another $1,000 to their contribution.
Put Your Finances on Autopilot
Often, when employees get their paychecks, they set aside the payment for their bills, groceries, and other immediate needs.
They may feel reluctant about their contributions, though, and usually, the last thing on their minds is to put away some for their savings.
If you are having trouble saving like many other people, then you can consider putting your finances on autopilot.
Many employers deposit their employees’ wages directly into their bank accounts.
Ask if they can deposit yours in two accounts – the first would be the one you regularly use and the other would be your real savings account. This means money you save in the latter should not be used for any ordinary everyday expense.
If it’s not possible for your employer to split your pay, then you can find a way to automate the transfer yourself. Capital One 360 is one service you can use for this.
Some employers also give the option to put their employees’ 401(k) plan on autopilot. While this is beneficial, especially for those who have a difficult time saving, you should check what the default percentage is.
According to Kiplinger, only 11 percent of employers with autopilot plans put the default at 6 percent or higher.
Almost 70 percent puts it at 3 percent or less, which, in general, is neither enough to save up for a secure retirement nor to meet the usual matching contribution requirement set by employers.
If there is an auto-increase feature, you can also use that in order to add more to your contribution at regular intervals.
For instance, you can have 1 percent increase annually. An auto-rebalance feature, if there is one, would also be good to use given how the market fluctuates.
Still, even if your 401(k) is on autopilot, you need to watch it carefully. You may need to make adjustments to the amount you contribute or which investments to put your money in.
You can also consider putting your bills and loan payments on an auto-payment scheme. However, you should not be lulled into complacency and forget to look into your expenses and investments.
As they say, don’t put all your eggs in one basket. Learn the different types of investment, understand their differences, and find out where your retirement money and savings are placed.
According to Investopedia, the types are: ownership investments (stocks, real estate, business, and precious objects); lending investments (savings and bonds); and cash equivalents (money market funds).
Finra lists them down as: bank products; bonds; stocks; investment funds (mutual funds, exchange-traded funds, closed-end funds); annuities; savings for college; retirement; options; commodity futures; security futures; alternative and complex products; and insurance.
By learning about the different types of investment, you can decide how to spread out your money. Often, your choices would depend on your age and what kind of investor you are.
For example, younger and more aggressive investors usually opt for stocks, while more conservative ones might go for bonds.
The best is a combination, with the former usually giving more returns but is more risky and the latter, less returns but also less risk.
It would be a good idea to do further research on each of the points above. Apart from reading articles like this, you can also talk to the HR department at work to find out about the different plans available to you or to a financial adviser in your bank.
As a final note, once you start saving for your retirement, don’t touch your money until you’re retired.
Some financial plans charge penalties for early withdrawal but even for those that don’t, resist the temptation of spending your money on something else other than its real purpose.