You’re probably not comfortable with thinking about retirement. However, we should because we’ll hit our senior years before we know it. Know how you can prepare your nest egg today so that you can retire comfortably in the coming years.
First, let’s go through the general rules of thumb people use when planning their retirement. Then, we’ll talk about how you can save for retirement using private and public options. Later, you’ll see how you can figure out how much you truly need.
Most people will spend several decades working a 9 to 5 job. They won’t be able to continue at a certain age, so they should plan their retirement. Learn how you can pool enough funds so you can spend your later years with peace of mind.
How do I plan my retirement?
It can be hard to think about retirement. Most people don’t have a clue on how they’ll live life in their 70s or above. Meanwhile, they have so many things to think about in the present.
How can you plan for retirement then? You could follow a general rule of thumb. According to Fidelity, the minimum amount should be 15% of your annual income.
This doesn’t consider a lot of other factors, though. First, you’ll have to start early if you want to follow this rule. For example, you’ll have to begin at age 25 if you plan to retire at age 62.
What’s more, it assumes that you can live off 55% to 80% of your pre-retirement salary. This probably won’t work if you do it late, such as age 50. You simply might need more.
Also, that 15% might not help you build a large enough nest egg. In other words, you might lack funds as you age further. You may need a larger amount, several times your annual salary.
So what’s the proper way, then? See how you can build a framework for your retirement plan. You should base it on your current needs, financial situation, and health condition.
#1. Estimated budget
You should take into account how much you’ll get from Social Security. It considers age 67 as retirement age. Read this file from the Social Security Administration for more details.
Then, you must estimate how much you’ll spend on health care. This is especially true if you have pre-existing conditions. Check how much you’ll spend on meds and other expenses.
If you have kids, then you’ll have to consider how much money you’ll leave them. If not, then perhaps you want to leave funds for a charity. Either way, you should check how it will cost.
#2. Earnings from savings
People invest in multiple assets to prepare for retirement. Examples include stocks, treasury bills, and other bonds. These grow in value over time.
Eventually, you can use those assets as funds for your later years. There’s one problem, though. It’s almost impossible to gauge how much your stocks will be worth in the long run.
Your best bet is to expect low returns from your investments. After all, inflation can diminish a lot of its gains. This will help you derive a more realistic estimate.
#3. Your lifespan
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— Wells Fargo (@WellsFargo) May 22, 2013
Nobody wants to think about how long they’ll live. It’s almost as depressing as planning a funeral. Yet, you’ll have to do it when building a retirement plan.
New York financial planner Gary Schatsky said, “Most people err on the shorter side of the estimate.” You might get in trouble if your funds don’t last long enough.
You may want to plan until your 90s just to be on the safe side. However, this may not work for those with frail health. They might want to plan for fewer years.
#4. Yearly withdrawal from savings
Retirement accounts have withdrawal limits. This means you can only take out a certain amount every year. Thankfully, a study found the most sustainable withdrawal rates for retirement.
It says you can withdraw up to 4% from a portfolio with 50% stocks and 50% bonds. So if you have $250,000 in savings, you can withdraw around $10,000 every year.
You have to meet your needs while making sure you don’t run out of money. This 4% may or may not work for you. See how much suits your retirement plan.
What are my options?
Saving for retirement may seem far away, but it's important to start early to have financial stability in the long-run. #CreditChat pic.twitter.com/fmcvFwYlOu
— Experian (@Experian) October 7, 2020
Individual Retirement Arrangements (IRAs) serve as your primary options. The government provides several types. Choose the one that suits your needs:
- Traditional IRA – It’s a tax-advantaged personal savings plan. The contributions may be tax-deductible.
- Roth IRA – This is also a tax-advantaged personal savings plan. Unlike the traditional option, the contributions aren’t considered tax-deductible. The qualified ones could be tax-free, though.
- Payroll Deduction IRA – Your employer sets this one. Employees submit contributions via payroll deductions to an IRA. This is established with a financial institution.
- Simplified Employee Pension – Otherwise known as a SEP, this is also set by your employer. This person will allocate contributions to each employee’s IRA.
- SIMPLE IRA plan – The acronym “SIMPLE” stands for Savings Incentive Match Plan for Employees. If you have one, you may choose to submit contributions via salary reduction. Also, the employer makes nonelective or matching contributions.
- SARSEP – This stands for Salary Reduction Simplified Employee Pension Plan. Employers set this type of SEP before 1997. It includes an arrangement to place some of your income in retirement.
You may set up your IRA with a financial institution, life insurance company, stockbroker, or mutual fund. They’ll provide you with further assistance.
The IRAs might not be enough for you. Perhaps you’re targeting a certain amount before you reach retirement age. Maybe you need it for your preferred lifestyle or pre-existing conditions.
In that case, perhaps you should invest in other assets. The investment returns could provide extra retirement money. In turn, these could serve as additional retirement accounts.
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Final thoughts
You could use an online retirement calculator to find out how much you need for retirement. These may not be enough, though. In this case, you may want to consult financial advisors.
These folks can help you reach your savings goal. Discuss with them how you can raise enough funds for retirement. What’s more, they could help you deal with debts.
If you owe money on credit cards, personal loans, or student loans, you’ll have difficulty saving for retirement. Get rid of them, and you’ll have more money for the future.
Learn more about saving for retirement
What is a retirement nest egg?
It’s a collection of various assets meant to fund someone’s retirement. These often contain IRAs, but you can place other types of assets. That way, you can build a bigger retirement fund. You may also place different kinds of investments inside IRAs, but make sure you follow their terms and conditions.
What is the average retirement nest egg?
This will depend on the person because everyone has different needs. Those will change how much money you’ll need in your later years. This is why you should have a nest egg that suits you. If you’re having trouble doing this, you may want to ask for help from a financial advisor.
How much money should you have saved for when you retire?
The amount of money you’ll need in retirement will depend on your needs. For some people, an IRA is enough to fund their later years. Others need to invest in other assets such as bonds and stocks to build a sufficient fund. You might want to request assistance from a financial advisor.
