The problem people often have with planning for retirement is that it is a vague, far-off need rather than an immediate, well-defined priority that they can start to tackle.
The following steps will help you bring retirement planning into sharper focus, so you can start to get your retirement savings on track today.
- Get Your Savings Program In Place Today
- Identify Your Savings Goal
- Consider Your Home and Mortgage As a Part of Your Retirement Plan
- Plan Your Investment Program
"Today" is the key word. When it comes to retirement planning, it needs to replace "someday" in your vocabulary.
The reason is, the sooner you start, the easier it will be to fund your retirement. Think about the principle of levers--the longer the handle, the easier the task. Retirement funding is like a single lever with your retirement date as the fulcrum. The more years you have on the pre-retirement side of the fulcrum, the easier it will be to handle the years on the post-retirement side.
That's why you need to start today, because the longer you wait, the harder the job gets.
You'll often hear generic retirement goals such as, "how to retire with a million dollars." That may sound like more than enough money, but is it really?
Take a simple example. Suppose you are 25 years old, plan to retire at 65, and expect to live to be 85. You can spread that million dollars over your 20 years of retirement and live on $50,000 a year. Fair enough, but did you know that with just moderate annual inflation (3%), that $50,000 would be the equivalent of only $15,328 by the time you retire, and $8,487 by the time you reach 85?
Simplistic targets won't do. You need a plan that accounts for inflation--and the possibility that you might outlive your normal life expectancy. Mark Twain once said that growing older was better than the alternative. Outliving your savings, however, might not be.
Buying a home and saving for retirement can seem like conflicting priorities, but they don't have to be. If you stay on track to pay off your mortgage, you will one day reach the point where you can start putting the amount of that mortgage payment into retirement savings instead. Also, you can downsize your home as you grow older and use some of the proceeds to fund your retirement.
The key here is to build equity. Don't look at home equity as a piggy bank to tap into whenever you want. Instead, look at it as a bank vault holding some of your retirement funds.
Your investments should not only be diversified, but each type of investment should have a specific role. For example:
- Use savings accounts for an emergency fund
- Use certificates of deposit to fund specific, near-term needs
- Use bonds for stability and income
- Use stocks for long-term growth
You may want professional help to put an investment program together. If so, pay attention to the reputation, track record, fees, and asset allocation expertise of the professional you choose.
If you have an employer 401(k) or similar plan with an employer matching contribution, you should make it a priority to take advantage of that match--otherwise, you are passing up free money. Additionally, 401(k) plans and IRAs allow you to defer taxes until retirement, which can also work to your advantage.
Once you know how much money you'll need to retire, and how you plan to invest your savings, you can figure out how much you need to save to meet your goal.
You can plan on being able to save more when your income is greater later in your career, but be realistic about how much you expect your income to grow. Remember, expenses have a way of growing as well. Also, use very conservative return assumptions on your investments, especially when interest rates are at low levels.
When you plan out your retirement savings over the course of your career, break the amount needed into individual, year-by-year savings goals. This way, you will make retirement savings a near-term objective, not a vague, far-off need.
Once you have a plan, make sure your spouse is on board. A successful saving program, and possibly even a successful marriage, depend on you and your spouse sharing the same vision of retirement and understanding of the sacrifices needed along the way.