One in every seven retirees (those aged 65 or older) in the U.S. live in poverty, according to the Secure Retirement Institute. Securing your retirement is a challenging yet crucial aspect of life. While economic circumstances, the job market and personal aspirations can often get in the way of effective retirement planning, you must persevere to ensure a stable future for you and your loved ones.
The most significant uncertainty around retirement planning is the lack of insight into exactly how many years one needs to save for. This problem often leads to poor choices, and one such choice is when you claim Social Security.
Many choose to claim the benefits at 62 years of age, even though their benefits could shrink by up to 30 percent compared to those who start claiming benefits later. In fact, your benefits grow 8 percent every year after 62 until you reach age 70. In other words, the amount you receive monthly could be higher if you claim Social Security later, at 65 to 70 years of age.
A little less than half of the worker population that does not save for retirement claims to not be able to afford to. Approximately 44 percent of workers believe their Social Security and pensions will be insufficient to cover even basic expenses during retirement. It is a problematic equation any way you look at it. The first questions you need to ask yourself before you get started on your retirement plan are:
- When should I retire?
- What kind of lifestyle do I wish to have?
- How much money will I need to maintain this lifestyle?
When to Retire
The decision to retire at a certain age is a tricky one, and often, the answer can vary at different stages in life. When you are young, you may plan your retirement for 70, hoping that you will work until then, but someone in their late 50s may be tempted to retire at 62, having tired of working for the better half of their life. But the decision plays a significant role in helping you determine how to reach your retirement savings goals. Your estimated retirement age factors in how you prepare for retirement.
How Much Do You Need?
According to experts, most people need 60 to 80 percent of their current income for retirement, assuming they maintain the same standard of living. Many believe that their expenses reduce drastically after retirement, which should compensate for a shortfall in income. But the truth remains that the reduction in expenditure is not enough to offset the lack of income, and other unexpected expenditures can put you in a tight spot financially.
When forecasting funds for your retirement, you want to expect the unexpected. Post-retirement, medical and miscellaneous expenses can often pile up and toss carefully laid plans out of the window.
Health care is a prominent expense among the aged. As per the U.S. Department of Health and Human Services, 70 percent of the population aged 65 years and above needs long-term care at some point. While Medicare is everyone’s fall back option, many do not realize it does not cover some long-term care costs.
To forecast your retirement expenditure, use your current spending as a starting point. Then, account for expenses that will go down, such as your office commute, and costs that could go up, such as your health care. You also need to factor in what kind of lifestyle you can maintain and any additional debts and mortgages, as well as consider any potential savings from your current expenditure, such as a smaller place with lower rent.
How Much Will You Have?
Assessing your Social Security benefits, 401(k), IRAs, pensions and investments will give you a fair idea of how much income you will have after retirement. Use the retirement estimators provided by the Social Security Administration online to get an estimate on your Social Security benefits.
The system provides estimates based on your past earning record but does not account for variance in earnings and other factors. Still, it is useful to get a ballpark figure. Comparing the numbers with your estimated expenses for retirement will help you understand where you are at and what you need to focus on.
Defined-benefit plans are employer-based and provide employees with benefits upon completion of a certain number of years at an organization. Employer pensions are defined-benefit plans that add to your income after retirement.
Review your other savings and investments to understand the payout. If you have access to your online portfolio with financial service providers, such as Fidelity, you can find all the necessary information on one portal. These providers’ tools and portals, such as Fidelity 401(k), enable quick access for employees, with detailed statements and reports.
Use one of the many retirement income calculators available online to estimate how much income you will have after retirement. You will need to input the necessary information, such as your income, expenditure, cash savings, IRA and 401(k), along with other details such as your current age and when you plan to retire in the retirement calculator for accurate estimates. This exercise is a must for everyone to get a realistic idea, and it serves as a tool to help retirement planners.
Tips to Check If You’re on the Right Track
The following are some tips you can use when determining if you are on track for retirement:
- Clear debts before investing.
- Have an emergency fund in place.
- Start saving for retirement early. Years lost in compounding interest can make all the difference in how comfortable you are tomorrow.
- If you have been saving 15 percent of your income consistently since you were 25, you are already ahead of the game.
- Savings must be consistent. If you are not used to saving regularly, start small at 5 percent and gradually increase.
- Double-check your plan with the 4 percent rule. Divide your desired monthly retirement income by 4 percent to reach the total amount needed.
- Age-wise savings are also good benchmarks to check yourself from time to time. By 40, 50, 60, and 67, you should have two times, four times, six times, and eight times your annual income in savings.
In a nutshell, retirement planning can be challenging, and starting as early as possible is the only way to stay ahead. Ensure your sayings are consistent month-to-month to secure your retirement years well in time.