We all have a different idea of retirement—some of us hope to travel, enjoy a favorite hobby or spend more time with the grandkids. Others may want to pursue an advanced educational degree or buy a vacation home.
Whatever our ideal “golden years” may consist of, it will take careful planning and sage financial advice to make those dreams come true.
The big picture
According to financial experts, most of us will need between 70 and 80 percent of our pre-retirement annual income to live comfortably after we have left the workplace. That is, however, if there are no major financial obligations hanging over our heads.
“There are many factors that come into play for that number to be realistic,” said Robert Petrocine, financial advisor with Ameriprise Financial, Saddle Brook. “For instance, are you in good health? Do you have mortgage payments or high credit card debt?”
We cannot predict unexpected events, such as serious medical problems or a catastrophic disaster that could severely impact our financial resources.
“But we should be as prepared as possible,” said Petrocine.
Consult the experts
Comfort and trust are the key elements when it comes to seeking advice, said Frank Pawlowski, co-managing director of Hunter Group CPA LLC in Fair Lawn.
“Financial planning is such a personal discussion, so feeling comfortable in trusting this person and their company is important,” he said. “Ideally, the best person to speak with is someone who has a neutral point of view about your money.”
He suggested that finding a company with advisors near your age might be a good place to start, as you hopefully will establish a lifetime relationship with someone you know.
A certified public accountant (CPA) and credentialed financial planner are excellent resources to help you achieve your goals. A CPA also might provide sound tax strategies that fit into your wealth management plans, Pawlowski added.
Petrocine advised that finding the right fit can make all the difference down the road.
“Don’t just assume that because you’re paying someone that he or she will do what’s best for you,” he said. “Don’t be afraid to interview them, too, before making any commitment. After all, who is that person going to be that will take the ride with you? Ideally, it’s someone who will be looking out for you.”
Save early and often
The idea of saving for retirement can be a hard concept to grasp if you are a teenager with a summer job or a young person just starting a career.
But that is precisely the time to start to build that nest egg, said Pawlowski.
“Ideally, as soon as a young adult enters the work force, they should begin putting aside a few dollars a paycheck into some retirement savings vehicle,” said Pawlowski. “Early saving, even if it’s small amounts, will yield tremendous benefits when retirement is reached.”
Pawlowski explained that because investments grow exponentially over time, even moderate savings per month can yield substantial dollars. For example, a one hundred a month investment at five percent left to grow over twenty years would give you approximately $42,000 in savings, he said.
“Keep investing at that rate for another decade and your nest egg can grow to $84,000. That is a powerful and compelling reason to save,” said Pawlowski.
However, experts also concede that expenses, especially when you are young, tend to dominate your spending. A new car, summers at the beach, cool electronics are much more appealing than an IRA or savings plan—especially when you first get a taste of a paycheck, said Petrocine.
“If you learn early how to save a buck and have the discipline to keep at it, you could end up being that millionaire next door one day, or at the very least, comfortable in your retirement years, which is the real goal,” he said.
If you are still young and you can’t save enough right now, do not be discouraged. Your income is likely to grow as you progress in your career, which in turn will allow you to save more. Other opportunities to save also might arise, such as a bonus or inheritance.
“These can make a difference in your long-term prospects if you invest some of the money in retirement accounts,” said Petrocine.
Create a plan, budget and be realistic
There was a time when Social Security and a company pension would be enough to bank on to support you in your golden years. That simply is not the case for everyone anymore.
“Retirement is more than just savings,” said Pawlowski. “It is also about discipline in your lifestyle today to be able to enjoy your time after your working career has ended.”
It is important to make realistic estimates about what kind of expenses you will have in retirement. Be honest about how you want to live in retirement and how much it will cost. These estimates are important when it comes time to figure out how much you need to save in order to comfortably afford your retirement.
One way to begin estimating your retirement costs is to take a close look at your current expenses in various categories, and then estimate how they will change. For example, your mortgage might be paid off and you won’t have commuting costs. But your health care costs can escalate dramatically and your property taxes are likely to rise.
You should also determine how you can chip away at wasteful habits that are eating up a lot of your potential savings. That might mean nixing “guilty pleasures” such as fancy dinners or unused health club memberships.
“If you enjoy buying expensive clothes, new cars every few years and traveling to exotic places, chances are you’re spending most or all of your wages on today,” Pawlowski said. “Worse, if you live your life with credit card debt and consistently overspend, it will be difficult to achieve any sort of comfortable retirement.”
Ask yourself honestly: Where am I now? And where do I want to be in 20, 30 or 40 years?
“If you don’t have a budget, create one. If you do have a budget, revise it periodically to reflect your focus on the future,” said Petrocine.
You can also delay your planned retirement date a few years, if possible. Working past the traditional retirement age will let you postpone withdrawals from your retirement accounts.
Your savings will have more time to grow, and you’ll reduce the number of years you’ll need to draw on them. Working longer may also let you delay earning Social Security benefits, potentially increasing the size of your monthly benefit.
Choosing the right savings plan
There are a multitude of tax-advantaged retirement savings vehicles, but because everyone’s situation is unique, there are no one-size-fits-all solutions.
Here are some examples:
- A ROTH IRA, which requires participants to pay taxes on the income they pay into the plan but grows tax free, and may be distributed all or in-part tax free.
- A traditional IRA defers the tax until funds are drawn years from now, either at retirement or with minimum withdrawals that are required once the individual reaches 70-1/2 years of age.
“Traditional IRAs assume that in retirement you will have a lower tax bracket and therefore will pay less in the future,” Pawlowski said.
- Many companies offer a 401(k) savings plan, where a percentage of income is invested through payroll deduction.
“You can quickly become adjusted to the income diversion, making it a pain-free savings plan,” Pawlowski said. Also, many companies offer a matching plan.
- Some employers offer a profit sharing plan, where accounts are established for employees that share a percentage of the annual profits with their employers.
“It’s important for you and your advisor to look at all your options to determine what’s the best plan for your situation,” said Petrocine. “Ask questions. And as your situation changes over the years, rehash if necessary to make sure you’re getting the maximum benefit for you.”
“For many of us, the concept of retirement planning has always been hanging in our mind, but reality tends to get in the way especially when we’re young,” said Pawlowski, “And children, education and housing place big ticket life decisions in front of us.”
It is never too late to start saving, he added. “However, a late start might mean relying on riskier investments that yield higher returns in order to reach your goals.”
If you are in your 40s or even your 50s and you have not gotten started yet, you are not alone.
Most people underestimate how much they will need to retire. In addition, people are living longer, translating to more potential post-working years. No need to panic. There are still a few things you can do. The key is to do them now.
First, make the maximum allowed contribution to your savings plan and stick to it.
Pawlowski said the United States government permits individuals over the age of fifty to make additional contributions each year (up to $6,000 in 2015) into their 401(k) or $1,000 into a traditional IRA (Individual Retirement Account) as a “catch-up” contribution.
Revisit and adjust
Recent activity on Wall Street is proof positive that markets rise and fall and can be quite unpredictable. Levels of income and expenses also fluctuate, so it’s important that you revisit your retirement plan every few years as your personal and professional situations change. For instance, if your retirement plan was done several years ago—before your second child was born, your mother-in-law moved in or your spouse started his or her own business—chances are your retirement plan is based on a lifestyle that is no longer relevant to what your goals are now.
“There is no definitive way to predict what will happen down the road. Life situations change all the time,” said Petrocine. “But having some foresight and adjusting accordingly can make it a much smoother and more comfortable journey into retirement.”
Angela Daidone is a freelance writer, editor and public relations specialist. She can be reached at firstname.lastname@example.org.