Will you have enough?
Saving for retirement doesn't need to be a difficult task. All it takes is a little planning and a great deal of persistence. It's one thing to develop a strategy; it's another to actually stick to it. If you do, the rewards will be worth it.
The term "saving" in this instance is really a misnomer. Saving is the act of putting aside money for an emergency or for a major purchase such as a car or home renovation. The more appropriate term to use would be "investing." You are investing funds in the hope that they will grow substantially and meet your retirement obligations.
Today, the responsibility for funding your retirement has shifted from the government and your employer and landed squarely on your shoulders. Your plan needs to be proactive, realistic and flexible. You're not always going to have funds available for your retirement program, but don't worry. It's not where you start that counts but rather where you finish. Just keep in mind that the best time to invest is whenever you have cash in the bank, separate and apart from savings and your emergency fund.
There are several different types of retirement account to choose from, each with its own advantages and disadvantages. Deciding on the best retirement investment strategy can be confusing, to say the least. Traditional individual retirement accounts (IRAs) allow you to make tax-sheltered annual contributions, but you pay income tax later when you withdraw from the account. Roth IRAs are the opposite: you pay income tax now, on your contributions, but withdrawals later are tax-free. A 401(k) account is a group investment plan, usually through your employer. These plans get better rates, because of the larger buying power of the group, and your employer may even match or top up your contributions. However, you get less choice in how the money is invested and when you get to take it out, since the plan is set up by your employer, not by you. Each of these retirement account options is discussed in detail in the next few pages of this site.
Okay, you've decided to put together an investment plan to fund your retirement. Here are some steps to develop your strategy:
First, decide if you require the assistance of a financial planner or investment adviser to help you with the process. Often, an experienced professional can help guide you through the steps involved and keep you on track when you find your commitment waning. Think of this person as the financial version of a fitness club trainer.
Now decide at what age you wish to retire. That will help you determine the amount of money you'll need to commit to your investment plan each year to make it happen.
- How much do you plan to live on when you retire? Many experts believe most retirees require far less than when they were working. Some will need as little as 65 percent of their pre-retirement income to live reasonably well. It makes sense to make your calculations based on 100 percent of your income. It's better to be safe than sorry.
- Do you plan to work? If you were to retire at age 65 and live until 85, that would be slightly less than one quarter of your entire life. That's an awfully long period to be doing nothing but golfing. You might decide to volunteer with charities you support. That won't bring in any additional income so your plan should reflect that. However, you may wish to consult with companies in need of your expertise and this would certainly reduce the amount of income required to pay for your lifestyle. Again, it's a good idea to assume you'll have no additional income during retirement and make your assumptions and calculations on that basis.
- Where do you plan to live? Are you going to remain in the family home or will you move to a smaller, more manageable residence? If so, will you rent an apartment and invest the proceeds from the sale of your home; if not, are you going to obtain a home equity line of credit to cover some of your expenses? These are all questions you need to address sooner rather than later. The longer you can take advantage of compounding interest, the better.
- What are your 401k and IRA options and how will you take advantage of these tax-deferred investment vehicles? Maximizing both vehicles is critical to your success.
- What is your asset allocation model for your investments? The composition will depend primarily on your time horizon and tolerance for risk. The older you are when you start, the higher the rate of return you'll require and the higher your risk tolerance will need to be.
- Lastly, constantly revisit and revise your plan, making changes along the way to ensure meeting your goals for retirement.
Procrastination is the enemy of retirement planning. Start your plan as early as possible and be persistent in following it.