Achieving your financial goals doesn’t just happen by itself. It takes a plan, implementing the plan, adhering to the plan, and when necessary, adjusting the plan.
As Benjamin Franklin said, "If you fail to plan, you are planning to fail".
According to the Department of Labor[i] (See link in footnote)
- Only 40% of Americans have calculated how much they need to save for retirement.
- In 2018, almost 30% of private industry workers with access to a 401(k) plan or something similar did not participate.
- The average American spends roughly 20 years in retirement.
Nearly everyone will receive Social Security, but Social Security won’t pay all the bills.
- Regularly saving is critical. Once you begin an automatic payroll deduction into a retirement account, you won’t miss it. I promise.
I can’t overly emphasize the importance of capturing your entire company’s match. It’s free money. Don’t leave free cash with your employer.
One can also fund personal retirement accounts such as IRA's or Roth IRA's. Just like 401k's have a limit on what you can contribute each year, IRA's do as well. They also have special rules on if you can deduct your contributions on your taxes or income eligibility requirements in the case of a Roth IRA.
- Start as early as you can. If one is recently out of college retirement can seem far off. That’s the case for many young people but this could be the perfect time to establish the important habit of saving for retirement.
Einstein said the 8th wonder of the world was compound interest. The earlier one starts, the better.
Let’s illustrate by way of example. Mary is 28 years old and plans to save $500/month or $6,000 per year until she retires at 65. With an annual return of 7% (assuming annual compounding. Not a guarantee and for illustrative purposes only), Mary will have amassed $962,024 when she turns 65 years old. Total contributions: $222,000.
Kate decides to put away the same amount. Kate is 22 years old and will save for 43 years. While her time to contribute is only an additional six years, her decision to start early is rewarded with a portfolio of $1,486,659. Total contributions: $258,000.
Because Kate started sooner, the additional $36,000 amounted to an additional $524,635![ii] (Source Investor.gov see link in footnote)
- What plan best fits my need? That question will depend on your personal circumstances. For many, your company’s 401(k) is tailor-made to save for retirement. This is especially true if your firm has a matching contribution.
Whether to fund a traditional IRA or a Roth IRA depends on many factors, including your marginal tax rate today and expected rate in retirement.
A Roth offers tax advantages if you qualify. Generally speaking, withdrawals from a Roth IRA are tax-free in retirement if you are age 59½ or older and have held the account for five years. But you won’t receive a tax deduction on contributions.
Current tax law does not require minimum distributions, which can be a big advantage in retirement.
A Roth may also be advantageous if you do not believe your tax rate will fall much in retirement or if you have outside assets that limit your need to withdraw on your retirement savings.
- How much will I need at retirement? My favorite answer is "It Depends". Much will depend on your individual circumstances. Your retirement expenses and lifestyle will dictate your income needs.
An old rule of thumb that you’ll need 70% of pre-retirement income may not suffice for many. For example, will you still be paying on a mortgage after you retire? Or, do you plan to downsize, which may reduce or eliminate monthly mortgage payments?
One approach some folks consider is the 4% rule. It’s relatively simple. Withdraw 4% of your total investments in the first year and adjust each year for inflation. Keep in mind, however, that this is a rigid rule. It assumes a 30-year time horizon and minimizes the risk of running out of money.
Depending on Social Security and any pension you may have, a more generous “allowance” from your savings may be in order.
- How do I find the right mix of investments? What worked when you were 30 years old probably isn’t appropriate today.
While our advice will vary from investor to investor, we can offer broad guidelines. Furthermore, retirement may be broken into different stages, which may require adjustments to the plan.
Some investors decide its best to take a very conservative approach. You know, “I can’t lose what I’ve accumulated because I don’t have time to recoup losses.” But that has its drawbacks. For starters, you don’t want to outlast your money. Equities, which have historically offered more robust returns, may still be an important part of an investment strategy. Bear in mind, every type of investment carries a degree of risk so always understand what you are investing in upfront. When in doubt, I can help you figure it out.
Others may be swept up by what might be called “the current of the day.” Stocks have surged, which may encourage investors to load up on risk. However, a comprehensive financial plan helps remove the emotional component that can creep into decisions.
- I’ve saved all my life. How do I begin withdrawing from my savings? It’s a complete shift in the paradigm. No longer are you socking away a percentage of each paycheck. Instead, you are living off your savings.
First, if you are required to take a minimum distribution from a tax deferred account, take it. There are pretty hefty penalties if you don't.
Next, consider interest, dividends and capital gains distributions from taxable investments, which continues to tax shelter assets in retirement accounts that are in excess of those pesky required minimum distributions.
If additional funds are needed, consider withdrawals from your IRA or other tax-deferred accounts if you are in a lower tax bracket. If you are in high tax bracket, you may consider pulling from your Roth. Those in a lower tax bracket could leave the Roth alone and take funds from their traditional IRA.
Let me reiterate that many of these principles are simply guidelines. One size does not fit all. Plans we suggest are tailored to one’s specific needs and goals.
As always, please feel free to reach out to me anytime for a conversation. Click HERE to see my calendar or just shoot me an email or give me a call.
In good health!
All the best.
Rick Fingerman, CFP®
Financial Planning Solutions, LLC (FPS) is a Registered Investment Advisor. Financial Planning Solutions, LLC (FPS) provides this blog for informational and educational purposes only. Nothing in this blog should be considered investment, tax, or legal advice. FPS only renders personalized advice to each client. Information herein includes opinions and source information that is believed to be reliable. However, such information may not be independently verified by FPS. Please see important disclosures link at the bottom of this page.