Figuring out how much money you need to retire is a complex calculation. Financial pros suggest starting with budgeting and saving guidelines like the 4% rule.
Estimate your housing, healthcare, food, and transportation costs—factor in additional expenses like entertainment and hobbies. Then, estimate what you hope to get from Social Security and savings. Contact Retirement Planning now!
It’s important to clearly understand your current financial situation before starting the retirement planning process. A thorough assessment will give you insight into your needs and goals and help identify any areas where additional savings may be required to reach them.
Your assessment should closely examine your investments, outstanding debts, and monthly expenses. You will also need to consider your future healthcare and living costs. If you need help figuring out where to start, meeting with a qualified professional can help. A professional can help you calculate the amount of money you’ll need in retirement and determine how much you should save to get there.
A common goal for those who are approaching retirement is to replace 70% to 90% of their pre-retirement income in retirement. This includes the cost of living, healthcare, and any planned activities such as travel or hobbies. Many people underestimate how much they will spend in retirement. It’s recommended that you create a budget to help you estimate your expected living expenses and factor them into your retirement planning.
You will also need to consider other potential costs such as long-term care insurance, and the cost of any changes you plan to make in your home or lifestyle. For example, extensive travel can quickly eat away at your retirement savings, and may require you to find additional sources of income.
Taxes should also be a consideration, as they can erode a significant portion of your savings and investments. It’s essential to be aware of the taxes that apply to retirement accounts, as well as any Social Security benefits you may receive.
Finally, it’s a good idea to take care of major expense items in the last 1-3 years before retiring. Paying for things like a roof replacement or new car will help you avoid having to rely on expensive credit cards or other forms of debt in retirement, which can add to the stress of this transitional phase in life. You should also set aside a fund to cover unexpected expenses.
Set Up a Savings Account
The best time to begin saving for retirement is as early as possible. This allows the power of compound interest to work in your favor, allowing your savings to grow faster over time.
However, if you started saving for retirement late or haven’t begun at all, it’s never too late to start. It may be a challenge to save as much as 15% of your paycheck each year, especially when you’re faced with other financial obligations like children, aging parents, a leaky roof or a new car. But every little bit helps. And remember, a healthy retirement savings nest egg gives you more flexibility in retirement, helping you to do the things you love most.
Many employers offer a 401(k) plan that lets you save pre-tax dollars, and some even match your contributions. You can also open an individual retirement account (IRA) to save additional money in a tax-advantaged account that is specifically designed for retirement. Depending on your income, you might be eligible to contribute up to $5,500 annually to an IRA or up to $213,000 into a SEP IRA.
Another option is to invest in a Roth IRA, which uses post-tax funds that can be withdrawn tax-free in retirement. This is a great option for people in higher tax brackets who might not be able to take advantage of the benefits of the 401(k) or traditional IRA. If you’re self-employed or do non-traditional work, such as freelancing or consulting, you might also consider a solo 401(k), which is available to business owners who have no employees and can contribute up to $69,000 in 2024.
Finally, state workers and some local government employees can save through the New York State Deferred Compensation Plan, which offers both pre-tax and Roth 457(b) accounts. Some states also offer special tax-advantaged plans, such as health savings accounts and 529 education savings plans, that can help you prepare for the future as well.
Invest in Your Future
As you approach retirement, your savings plan should take into account that many of your expenses will not be as necessary as they are today. This is an ideal time to invest your money in more conservative assets such as cash or bonds. This is a great way to mitigate the risks associated with a market crash occurring right before you retire.
However, it is important to remember that you will still need money for certain expenses such as housing, health insurance, food and clothing. It is also recommended that you have emergency savings set aside as well, since those can help bridge the gap between income and spending if a sudden need arises. Depending on your circumstances, you may also want to consider setting up traditional and employer-sponsored IRAs. This can allow you to save more tax-efficiently compared to regular savings accounts.
Getting your retirement planning on track can take some professional guidance. A financial advisor can assist with everything from investment options to retirement savings strategies to roadmaps tailored specifically for you and your situation.
The more you save and the earlier you start saving, the more you’ll have to live off of in retirement. This is why it’s a good idea to make retirement planning an ongoing priority, even if you can only contribute small amounts each month. Over time, those small contributions can add up to a significant amount of money.
It is also important to determine your target retirement spending level. This can be difficult as a lot of your current costs are likely to continue into retirement, such as childcare expenses, education expenses, and lifestyle-related items like entertainment, travel, and hobbies. It is helpful to create a budget to help you calculate the estimated cost of your retirement needs.
This can then be used to help you determine how much you should save each month. Setting up automatic deductions from your paycheck to a retirement or brokerage account can be a great way to stay on track with your savings goals. It can be easy to get distracted by other things, but automating these savings can help you stick to your retirement plans.
Delay Retirement
The first thing to consider is how much income you’ll need in retirement. This number will depend on your personal situation, but it’s important to have an idea of what your budget will look like when you stop working. You can find tools online to help you calculate this, and it’s also important to talk with your financial professional about your specific circumstances.
Depending on the amount of savings you have, delaying retirement may make sense for you. The years immediately preceding retirement are typically people’s highest earning years, so delaying Social Security by a year or two could help you save more for your future. And as a bonus, you can still work and earn money and still contribute to your retirement accounts.
Another benefit of delaying Social Security is that you’ll lock in a larger lifetime stream of benefits. While most people think of this as the main reason to delay, there are several other benefits as well.
For one, you’ll get more in monthly payments, since your Social Security benefit is based on your highest earnings each year of employment. You’ll receive about 8% more per month for each year you wait beyond your full retirement age (FRA) up to 70.
In addition, you’ll still be able to sock away more money in your retirement accounts, since the government allows you to make catch-up contributions as you approach FRA. These additional contributions can add up to a significant amount of extra money.
One of the biggest concerns in retirement is running out of money. By delaying retirement, you’ll have more time to invest your savings and earn a return on those investments. This will ensure that you’ll have enough money to last throughout your entire life.
It’s not always possible to delay retirement, as some people must retire early due to health issues or changes at their jobs. However, you can take steps to prepare for retirement by paying off debt, shoring up insurance, and cutting unnecessary costs before you exit the workforce. If you’re thinking about retiring soon, speak with a New York Life financial professional to discuss your options and develop an appropriate strategy for you.
