Are you saving enough for your retirement? Consider these tips.
Start by determining what you've saved so far. That includes obvious savings, such as stock and bond investments, mutual funds, saved cash, IRAs and 401(k) plans. But don't forget things like 401(k) plans from prior employers or investments you may have with different brokerages.
Next, determine how much money will be "enough" when you retire. The trick here is that what's "enough" differs for everyone. If you're a big spender now, don't expect that pattern to change significantly when you retire. The same holds true if you're frugal. A lifetime of spending habits tends to stick, regardless of income. You'll want to factor that into your retirement numbers.
What to Consider?
"You want to take a look at what your essential expenses are going to be, things that need to be paid each month no matter what, like utilities, food, and housing," said Lisa Cargill, CRPC, CDFA, Financial Advisor with Ameriprise Financial Services. "Then you want to factor in lifestyle expenses—your hobbies, travel, gifts—all the things that could be tweaked if need be."
Don't Forget ...
Health care expenses is among the biggest categories people overlook when planning for retirement. "When people think of Medicare, they think of it as free or at a reduced price, but they still have premiums," explained Jennifer Baldini, CFP, Financial Advisor with Rehmann Financial. You'll also want to plan for potential long-term care costs.
Other underestimated common expenses are vacationing and hobbies. When you have more free time, you'll want to do more of what you enjoy. And the expenses associated with those activities add up fast. If you start saving early—or accelerate saving later—you can bank enough to do the things that make you smile during your retirement years.
How early should I start?
Now. It's never too early to begin saving for retirement. Ideally, you'll tuck savings away from your very first paycheck. "It's amazing the difference between starting early and late," Baldini said.
"Always participate in your employer-sponsored retirement plan," urged Cargill. "Even if you don't think you can afford it, do it anyway, At least contribute enough to get the maximum match from your employer—otherwise you're just giving up free money." This advice holds true whether you're just starting out or have spent years building your nest egg.
If you decide to save for retirement outside of a 401(k) plan, you might struggle to actually stash the cash. "People have good intentions of saving, but find it harder to follow through when they do it that way," warned Baldini.
Despite your best efforts, unexpected events may throw you a curve ball. "Sometimes, life just gets in the way," Cargill said. "Emergencies may come up, an illness or a disability, the cost of kids, or education expenses." She recommends planning for those possibilities by having a healthy six-to-eight-month cash reserve and insuring your income. "So many people insure homes and cars, but their biggest asset is their ability to go to work every day. Have an income protection plan in place!"
Accessing Your Nest Egg
When the day comes to finally retire, you'll want to take distributions from your various investments in a tax-efficient manner. Some types of investments are taxed as regular income, some withdrawals are tax-free, others are subject to preferential capital gains tax treatment, and the list goes on. "Having a distribution strategy is key," Baldini said. Consider speaking with an investment advisor to review your options.
Be Ready—Not Just Financially
When we spend a lifetime hurrying from work to home to other commitments, retirement sounds like bliss. But for many people, not having work creates an unexpected void. Cargill has seen many people struggle with how to replace the time they spent investing in their careers. "Make certain you know what you're going to do with your days," suggested Cargill.
"Make a plan for your hobbies, for volunteering, for the things you'll do." When you do so—and plan for it financially—you pave the path to sail, bike or travel your heart out.
Kirsetin Morello is a Michigan-based author, speaker, writer, travel-lover, wife and grateful mom of three boys. Read more about her at www.KirsetinMorello.com.