When you envision retirement, do you picture yourself living in a warm climate, traveling to exotic places, or doing whatever suits you on any given day? It might surprise you to learn that, regardless of your age or circumstance, a “lifestyle plan” is an important part of retirement planning.
Knowing how you want to spend your retirement years, where you might like to live, and which activities you plan to pursue is necessary in determining the total amount of cash you’ll need. A general rule of thumb suggests that you may need 60% to 80% of your current income per year in order to maintain your current standard of living in retirement. If you find this figure surprising, you are not alone.
Many people think that Social Security will provide a large portion of their retirement income. However, Social Security was designed to be a supplement to retirement savings, rather than a primary source of income. To calculate an estimate of your future Social Security benefits online, you can go to the Social Security Administration’s website at www.ssa.gov. You will learn the amount of your expected payout, and can then determine the amount of income you may need to supplement your desired lifestyle.
Since Social Security provides only a portion of needed income, many people rely on savings to make up the difference. Yet, according to the 2011 Retirement Confidence Survey(RCS)conducted by the Employee Benefit Research Institute (EBRI, 2011), 27% of workers now say they are "not at all confident" about retirement, up 5% from the level measured just one year ago. In addition, the percentage of workers who say they are "very confident" of a comfortable retirement ties with 2009 at 13%—the lowest rate ever measured by the RCS. While 59% say they are currently saving for retirement, 56% report having less than $25,000 in savings and investments, excluding the value of their primary residence and any defined benefit (pension) plans.
With the decline of traditional pensions and the uncertain future of Social Security, individuals have become increasingly responsible for funding their own retirement, but according to these statistics, many have yet to take that important first step.
Taking the First Step
Starting a retirement savings plan may be a lot easier than you think. In fact, the first step is often to accept “free” money in the form of your employer’s benefits. This may include a traditional pension, also known as a defined benefit plan, that your employer contributes to on your behalf, which is then payable to you upon retirement.
Currently, a common benefit option is a defined contribution plan, such as a 401(k). Deducted from your paycheck before taxes, 401(k) contributions have the potential to grow tax deferred. Your employer may match your contributions up to a certain percentage of your salary. But first, you have to take some initiative. In order to fully benefit from the matching contribution, you must make contributions.
Because contributions are deducted from gross pay, they may have a relatively minor impact on your net income and can be of great benefit to your overall nest egg. For example, saving $5,000 today, over a period of 15 years, at a hypothetical 5% rate of return, could amount to over $10,569 in additional savings income.
Individual Retirement Accounts
In addition to employer-sponsored plans, many people are contributing to Individual Retirement Accounts (IRAs) to save for retirement. Traditional and Roth IRAs allow for annual contributions of $5,500 for 2013. In addition, for those age 50 and older, annual “catch up” contributions of $1,000 are allowed. Funds in both accounts are subject to a 10% Federal income tax penalty if distributions are taken before age 59½. However, certain exceptions may apply.
Depending on your income and participation in an employer-sponsored plan, contributions to a traditional IRA may be tax deductible, and earnings have the potential to grow tax deferred until you retire. Contributions to a Roth IRA are made after taxes, but withdrawals are tax free in retirement, provided you are age 59½ or older and have owned the account for at least five years. Saving as much as you can each year can have a significant impact on your ability to reach your retirement goals.
You can achieve your retirement goals and live the lifestyle you desire, if you develop a game plan. Take time now to evaluate your resources, set retirement goals, and take the necessary steps to reach them.