Your golden years are looming closer and closer. If you haven't started your retirement plan yet, you better start today. You may only have 15 years of your working life left, and lots of saving to do. Don't forget that retirement planning is just one element of a comprehensive financial plan. You'll want to balance your retirement planning against other important objectives, such as savings, budgeting, insurance, and debt.
It's never too late to start saving for your retirement. Every dollar you put away today will help you after you stop working.
Generally speaking, there are primarily three potential sources of retirement income:
There is an additional source of retirement income - working after you reach retirement age. And while you may decide to continue working in your retirement years, you may want to work hard on your retirement plan now, so you won't have to rely on this income.
Creating this portion of your retirement income is entirely within your control. Many financial advisers agree you should save approximately 10% of your income annually. Some of this should be set aside for emergencies and the rest should be earmarked for retirement. For your retirement, consider taking advantage of tax-deferred investment vehicles. Tax-deferred means you don't pay taxes on your investment earnings until you use the funds. Just like the 401(k) described below, you can invest your retirement funds into tax-deferred plans, such as IRA's and Keoghs, to maximize your rate of return. If you are not eligible for a 401(k) program at your work, you may be able to deduct your IRA contributions on your taxes - up to $2,000 each year. If you are eligible for a 401(k), there are additional rules about partial deductibility, depending upon your income and the type of IRA you have, so check with a financial professional or the IRS to determine if you qualify for a tax deduction. Don't forget that IRA's are specifically designed as retirement investments, and you may pay a substantial penalty for early withdrawal.
Have you been investing in your employer-sponsored 401(k)? You should try and take full advantage of this savings oppurtunity. You may have to make some adjustments to your budget to allow for investing. If you can afford to, you should probably consider it very carefully to help assure you a comfortable retirement. Remember that 401(k) deposits are tax-deferred. This means they are deducted from your pay before taxes are assessed. For example, assume you are in a 28% tax bracket, and you are thinking about investing $50 each paycheck into a 401(k). If you receive that $50 in your pay, it will be taxed at 28% and you'll really only receive $36. However, if you put it in a 401(k), you get the full credit of the $50, plus you earn tax-deferred investment interest. And, if your employer matches your investment, you've got a windfall! You'll need to decide how important that $36 is to your budget before making a choice. Don't forget that 401(k)'s are specifically designed as retirement investments, and you may pay a substantial penalty for early withdrawal. Therefore, careful planning is important to ensure the right balance between savings and retirement investments.
If you currently work, or previously worked for a company that provides an employer-paid pension, that's great news. A pension is a retirement plan paid for by your employer. You may want to check with your company's benefits administrator and ask for an estimate of how much you will receive once you finally retire. Don't forget to periodically check the financial condition of previous employers that owe you a pension to make sure it's still a reliable source of retirement income.
The Social Security Administration provides free estimates of your projected retirement benefits based on your historical income to date and the number of years you have worked. If you haven't already received an estimate, you can request this estimate any time. At your age, there should be minimal impact from all of the concern around Social Security benefits drying up. While you should be able to rely on Social Security as a part of your retirement income, there may be an additional tax burden levied on your benefits. You may also encounter a delay in receiving full benefits due to changes in the predetermined retirement age. If you were born in 1950 or later, the normal retirement age has been increased from 65 to 66.
Many financial advisors agree that, to maintain the standard of living you have become accustomed to, you should plan on needing roughly 80% of your annual working pay during retirement. Remember, your retirement funds can come from any or all of the sources discussed. To illustrate, let's say you earn $65,000 during the year just before you retire. You'll need to plan on having $52,000 ($65,000 x 80%) each year during retirement to live comfortably and in the general style to which you have become accustomed. Let's take this one step further. If you plan on a long retirement of 20 years, you'll need $1,040,000 ($52,000 x 20). This is a very simplistic approach since it doesn't allow for potential investment earnings or the effect of inflation on your buying power. But it will give you a general guideline of how much your expenses may be during your retirement years.
You are responsible for investing your private savings and your 401(k) funds to maximize return, growth, and income. When you reach your 50's, you may want to get a little more conservative in your investment choices. While many financial advisors subscribe to some general investment strategies for people getting closer to retirement, you should consider your personal financial situation carefully and may want to consult with a financial professional. The most important evaluation criteria you need to consider is your own financial condition and your risk tolerance. As a general rule, you may want to consider keeping about 60% of your investments in stocks and the other 40% in bonds and other fixed-income investments. This approach still allows you the benefit of higher returns from stocks but also ensures a solid and predictable rate of return from a sizeable portion of your nest egg. Remember that stocks are always potentially risky, so you should adjust your allocation according to your own personal circumstances.
Keep in mind, though, you might not want to count on this income as part of your retirement. Your health and the availability of jobs are difficult to anticipate, even over the next few years. If you plan carefully now and make sure you have enough set aside, you may not have to rely on this as a necessary source of income and can choose to work only if you want.
Consider your situation carefully today. Once you get into the habit of setting aside money for your retirement, it will be easy and you probably won't even miss it. You may even enjoy watching your savings grow. Remember you can always adjust your retirement savings plan and investment decisions as your situation changes.
For more information about retirement, 401(k)'s, pension plans, or Social Security, read our related articles listed in the Library.
It's never too late to start saving for your retirement. Every dollar you put away today will help you after you stop working.
Where Does the Money Come From?
Generally speaking, there are primarily three potential sources of retirement income:
- Private Savings or Investments
- 401(k)'s or pensions
- Social Security Benefits
There is an additional source of retirement income - working after you reach retirement age. And while you may decide to continue working in your retirement years, you may want to work hard on your retirement plan now, so you won't have to rely on this income.
Private Savings or Investments
Creating this portion of your retirement income is entirely within your control. Many financial advisers agree you should save approximately 10% of your income annually. Some of this should be set aside for emergencies and the rest should be earmarked for retirement. For your retirement, consider taking advantage of tax-deferred investment vehicles. Tax-deferred means you don't pay taxes on your investment earnings until you use the funds. Just like the 401(k) described below, you can invest your retirement funds into tax-deferred plans, such as IRA's and Keoghs, to maximize your rate of return. If you are not eligible for a 401(k) program at your work, you may be able to deduct your IRA contributions on your taxes - up to $2,000 each year. If you are eligible for a 401(k), there are additional rules about partial deductibility, depending upon your income and the type of IRA you have, so check with a financial professional or the IRS to determine if you qualify for a tax deduction. Don't forget that IRA's are specifically designed as retirement investments, and you may pay a substantial penalty for early withdrawal.
401(k)'s or Pensions
Have you been investing in your employer-sponsored 401(k)? You should try and take full advantage of this savings oppurtunity. You may have to make some adjustments to your budget to allow for investing. If you can afford to, you should probably consider it very carefully to help assure you a comfortable retirement. Remember that 401(k) deposits are tax-deferred. This means they are deducted from your pay before taxes are assessed. For example, assume you are in a 28% tax bracket, and you are thinking about investing $50 each paycheck into a 401(k). If you receive that $50 in your pay, it will be taxed at 28% and you'll really only receive $36. However, if you put it in a 401(k), you get the full credit of the $50, plus you earn tax-deferred investment interest. And, if your employer matches your investment, you've got a windfall! You'll need to decide how important that $36 is to your budget before making a choice. Don't forget that 401(k)'s are specifically designed as retirement investments, and you may pay a substantial penalty for early withdrawal. Therefore, careful planning is important to ensure the right balance between savings and retirement investments.
If you currently work, or previously worked for a company that provides an employer-paid pension, that's great news. A pension is a retirement plan paid for by your employer. You may want to check with your company's benefits administrator and ask for an estimate of how much you will receive once you finally retire. Don't forget to periodically check the financial condition of previous employers that owe you a pension to make sure it's still a reliable source of retirement income.
Social Security
The Social Security Administration provides free estimates of your projected retirement benefits based on your historical income to date and the number of years you have worked. If you haven't already received an estimate, you can request this estimate any time. At your age, there should be minimal impact from all of the concern around Social Security benefits drying up. While you should be able to rely on Social Security as a part of your retirement income, there may be an additional tax burden levied on your benefits. You may also encounter a delay in receiving full benefits due to changes in the predetermined retirement age. If you were born in 1950 or later, the normal retirement age has been increased from 65 to 66.
How Much Do You Need?
Many financial advisors agree that, to maintain the standard of living you have become accustomed to, you should plan on needing roughly 80% of your annual working pay during retirement. Remember, your retirement funds can come from any or all of the sources discussed. To illustrate, let's say you earn $65,000 during the year just before you retire. You'll need to plan on having $52,000 ($65,000 x 80%) each year during retirement to live comfortably and in the general style to which you have become accustomed. Let's take this one step further. If you plan on a long retirement of 20 years, you'll need $1,040,000 ($52,000 x 20). This is a very simplistic approach since it doesn't allow for potential investment earnings or the effect of inflation on your buying power. But it will give you a general guideline of how much your expenses may be during your retirement years.
How Do You Get There?
You are responsible for investing your private savings and your 401(k) funds to maximize return, growth, and income. When you reach your 50's, you may want to get a little more conservative in your investment choices. While many financial advisors subscribe to some general investment strategies for people getting closer to retirement, you should consider your personal financial situation carefully and may want to consult with a financial professional. The most important evaluation criteria you need to consider is your own financial condition and your risk tolerance. As a general rule, you may want to consider keeping about 60% of your investments in stocks and the other 40% in bonds and other fixed-income investments. This approach still allows you the benefit of higher returns from stocks but also ensures a solid and predictable rate of return from a sizeable portion of your nest egg. Remember that stocks are always potentially risky, so you should adjust your allocation according to your own personal circumstances.
Supplementing Your Retirement With Part-Time or Full-Time Work
If you are still in good health at retirement or you need additional income to make ends meet, you may decide to supplement your retirement income by working either full-time or part-time. There are many options to consider, from turning a hobby into a business, to starting your own brand new business, to continuing your old career. Recent legislation passed makes this an attractive option for current retirees. Until just recently, Social Security benefits were reduced if your earned income exceeded a certain amount. Working after retirement may also provide benefits beyond those that are financial; it allows retirees to preserve social interaction and reap the personal rewards of maintaining a working life.Keep in mind, though, you might not want to count on this income as part of your retirement. Your health and the availability of jobs are difficult to anticipate, even over the next few years. If you plan carefully now and make sure you have enough set aside, you may not have to rely on this as a necessary source of income and can choose to work only if you want.
Consider your situation carefully today. Once you get into the habit of setting aside money for your retirement, it will be easy and you probably won't even miss it. You may even enjoy watching your savings grow. Remember you can always adjust your retirement savings plan and investment decisions as your situation changes.
For more information about retirement, 401(k)'s, pension plans, or Social Security, read our related articles listed in the Library.
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