There are a lot of options to weigh as you decide how to save for retirement. You may have savings accounts established and a vision for the lifestyle you want, but don’t forget these four essential steps when planning for your retirement:
It may seem like a clear first step, but according to the Employee Benefit Research Institute, only half of workers (48%) have used a retirement calculator to determine how much money they will need to live comfortably in retirement. Any retirement savings will be better than no savings. However, your future will be more secure with a rhyme and reason to your saving strategy. A specific goal number allows you to make more concrete plans to achieve that goal by the time you retire.
The usual advice is to have enough saved to replace 70% to 90% of your annual pre-retirement income in each year of retirement. This percentage can be achieved through a combination of your savings, Social Security, and any supplementary income sources that continue into retirement (e.g. renting out extra rooms or vacation homes). In other words, a worker with a current annual income of $90,000 per year should plan to have $63,000 to $81,000 available per year for spending in retirement.
Employer-matched 401k plan contributions and personal IRAs are some of your most efficient and powerful tools for retirement saving. If at all possible, you’ll want to max out your limit for employer-matched savings as well as traditional IRAs and Roth IRAs, including catch-up contributions (if you’ve started late or fallen behind). For 2022, individuals 50 or older can contribute a maximum of $1,000 in catch-up money over the regular IRA contribution limit of $6,000 (for $7,000 in total).
Saving is important, but don’t forget to plan ahead for how you’ll access and use those savings when the time comes. Your draw-down strategy will focus on maximizing your annual retirement income and minimizing the amount that goes to taxes. It’s likely that your tax situation will be highly unique based upon the area where you live, your income level, and the types of investments you’ve made before retirement. Speak with a qualified financial expert to get a good grip on how you’ll want to juggle tax-related issues.
It’s also worth investigating options like annuities, which can provide steady monthly paychecks in retirement, as you evaluate your overall plans. Single premium immediate annuities (SPIAs) are one potential option if you’re planning for your retirement later in your career and will need less risk, more certainty, and immediate monthly payouts.
For retirement savers who are more interested in growth-based savings goals and can wait a long time before the annuity begins to pay out, consider variable or fixed index annuities. On the other hand, if your goal is to grow your savings and you don’t need income right now, you may be better off with a deferred annuity with more growth potential, like a variable or fixed index annuity, or direct investments in the stock market.
Medicare may cover many routine healthcare-related costs after age 65, but it won’t cover long-term care in most cases. There are also likely to be nonroutine healthcare costs that arise and can cut into your retirement savings.
One way to protect your retirement income from medical costs is to include long-term care insurance in your budget. The earlier you buy in, the lower the premium will be (and the more likely you’ll be accepted by insurers).
Health savings accounts are also an excellent tool for tax-advantaged medical payments on qualified expenses. Remember that unspent money can continue to accumulate and compound, tax-free, until you finally need it during your retirement. Consider maximizing your contributions to these sorts of accounts to reduce costs later on.
These steps are a few helpful reminders about the things you’ll need to consider while planning for your retirement, but they’re just the beginning. You’ll better understand how to save for retirement if you brush up on more specifics in pre-retirement planning workshops and other retirement education courses. The Financial Educators Network can connect you with a convenient two-session course in your area (or online) with a licensed instructor. Find your course today.