When envisioning retirement, you may picture the Jay-Z and Beyonce life of living in tropical climates, traveling and sightseeing at leisure, or doing whatever suits you on any given day. Regardless of your age or circumstance, it might surprise you to learn that a “lifestyle plan” is an important part of retirement planning. Many of my clients know they want to retire, but they’ve never planned out how they want to live. Today’s average life span is almost 90. That’s 25 years you need to plan for if you retire at age 65.
Knowing how you want to spend your years after you retire from your job, where you might like to live, and which activities you plan to pursue, is necessary to determine the total amount of cash you’ll need. In order to live comfortably in retirement, you need about 70% of your current income PER YEAR (American Savings Education Council, 2011). If this figure comes as an uncomfortable surprise, you are not alone. Unfortunately, participating in just your 401K and relying on SSI to help is not going to get the job done. Many Baby Boomers are finding that out the hard way right now and are delaying retirement. As young professionals in our prime earning years, we need to prepare and take action to achieve the goal of a comfortable retirement where we don’t have to go back to work at age 75 or move in with our kids. Hopefully, this article sparks some action if you aren’t already actively working towards this goal.
Although many people think that their Social Security benefit will provide a large portion of their retirement income, for the most part, it is a supplement to their retirement savings, rather than a main source of income. [quote_left] You can get an estimate of your future Social Security benefits by going to the Social Security website at www.ssa.gov and using the online estimate calculator. [/quote_left] By obtaining your estimate of benefits online, you can plan for the amount of income you will 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. And yet, according to The 2011 Retirement Confidence Survey (RCS), 46% of respondents who are age 45 or older report having total savings and investments of less than $25,000. Further, 27% of workers ages 25–34, and 29% of workers ages 35–44 are not at all confident about the likelihood of having enough financial resources to be comfortable during retirement. (EBRI, 2011).*
With the decline in traditional pensions and the uncertain future of Social Security, individuals are increasingly responsible for their own retirement funds, but according to these statistics, many have yet to take that important first step.
Taking the First Step
Starting a retirement savings plan can be a lot easier than you may think. In fact, the first step is to accept “free” money. This means taking full advantage of all 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.
Today, a more common benefit option is a defined contribution plan, such as a 401(k). Your employer may offer a company match in contributions up to a certain percentage. That’s free money increasing your principal that did not come out of your paycheck, but you must make the contributions. Employer-sponsored 401(k) plan contributions may be deducted from your paycheck before taxes, and have the potential to grow tax deferred.
Because money is deducted from your gross pay, you may find that your contributions have a relatively small impact on net income, and can be of great benefit to your overall nest egg. [quote_right] 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. [/quote_right]
Individual Retirement Accounts
Since retirement may require 75–90% of your current income, many people are contributing to Individual Retirement Accounts (IRAs) in addition to employer-sponsored retirement saving plans. Traditional and Roth IRAs allow for annual contributions of $5,000 in 2012 for those under age 50. For those age 50 and older, annual “catch up” contributions of an additional $1,000 are allowed in 2012. Funds in both accounts will be subject to a 10% Federal income tax penalty if distributions are taken before age 59½, however, certain exceptions apply.
Depending on your income and participation in an employer-sponsored plan, contributions to a traditional IRA may be tax deductible and earnings grow tax deferred until you retire. Contributions to a Roth IRA are made after taxes, but are tax exempt when you withdraw in retirement, provided you are age 59½ or older and have owned the account for at least five years. Taking the opportunity to save as much as you can afford each year could have a favorable and significant impact on your ability to reach your retirement goals.
The outlook for retirement is rapidly changing as more and more people anticipate and prepare for active and adventurous lifestyles. Taking time now to set life goals, and implement the steps necessary to reach them, will greatly enhance your chances of wearing sandals on a beach when that happy day finally arrives.
* Source: Employee Benefit Research Institute (EBRI), The 2011 Retirement Confidence Survey (RCS).
Feel free to contact me if you have questions and want to discuss the steps to making your financial dreams a reality.
K. Orian Williams, J.D.
Financial Services Professional
Fleur de Lis Financial an agency of Mass Mutual Financial Group
One Galleria Boulevard
Metairie, LA 70001
The information provided is not written or intended as specific tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. MassMutual, its employees and representatives are not authorized to give tax or legal advice. Individuals are encouraged to seek advice from their own tax or legal counsel.