Retirement is compulsory for those working under someone, and you must learn to set yourself up to have a secured retirement. There is a lower chance of getting a pension from an employer nowadays. Although seniors may get Social Security benefits from their employer, this may be too small to live on after retirement and without the addition of a personal income. What you need to do is to secure a financially-safe retirement by saving enough during your service days. It is not easy to save such a big amount, and you have to start thinking about how to start saving now to hit your target; it is never too late. Below are three questions you must be able to answer, if you can’t answer them, your retirement may be in trouble, even after leaving the workforce for good.
1. How Much Should You Save for Retirement?
You may not know how to get started and the target you will be working on if you don’t have a particular retirement savings goal. You have to decide on a particular amount you need as your target retirement savings. You can do this in several ways including:
Having a goal of saving ten times your monthly salary – This is the simplest method of having a particular retirement saving goal. All you have to do is to estimate your final salary and multiply it by 10. This is okay, but it may not be enough for you since it does not put into consideration the amount you will be spending after retirement.
Calculate the amount you will be needing after retirement and work backward – With this method, you need to think about a particular amount you will be spending after retirement; this can be around 80% to 90% of your salary while in the workforce. You can also figure out the amount you will spend in retirement if you are closer to retirement. Once you know this, you will just withdraw 4% of your retirement in a year.
Use a retirement income formula or calculator – There are several online income calculators you can use to calculate how much you need to save for your retirement. You will also know how much you need to be saving every year. You can get such a calculator from Vanguard and other sites.
2. Where are you investing your retirement money?
It is very important to invest the amount of money you are saving in your retirement account, and you must make sure you are investing much money in the right investment classes and the right proportions. The first thing to do is to select the perfect tax-advantaged investment account to deposit and grow your savings.
Most people choose the Individual Retirement Account (IRA), or the 401(k) plan to save their retirement savings. These accounts have tax breaks for account owners to reach their saving goals easily. An example is if you invest $15,000 in any of these accounts with a 22% income tax bracket, you will receive $3,300 deduction in the amount of tax you will pay that year. Your investment must not be too aggressive so that you don’t run the risk of losing money. Saving of $10,000 annually with 7% return rate for 35 years will yield up to $1.38 million but being conservative, and you earn just 4% annually, you will have just $736,000 which may not be enough to spend when you retire.
3. How many fees are you paying?
If you are paying higher fees for a long period, it may affect the returns you earn. For example, if you are investing $10,000 annual contributions with a 7% return on the investment for 35 working years, you will get up to $1.38 million. However, if you are paying a fee of 1%, you will end up getting around $1.11 million which is like you are not paying fee at all; this is still enough to live on. In contrast, if you are paying 2% fees, you will get around $903,000 which is lower than that of 1%. If your fees went up as high as 3%, you would get just $736,000 at the end of the 35th year which is quite small.
You must pay attention to the fees you will be paying as you will not want to lose thousands of dollars to pay fees. These fees could be administration fees charged on your account or expense fees charged by ETFs or mutual funds. Keep your fees lower to get enough cash to spend after your retirement from the workforce.
Stay on track to have a comfortable retirement. With the above three questions answered correctly, you will retire in style. Make sure you find answers to these questions and start planning your retirement today. It is never too late.
