June 8, 2022
Retirement planning today looks different than it has in the past, and it will probably continue to evolve. The time to start planning for your retirement is while you’re in the early stages of your career—when you’re entering the workforce—so you can begin building your savings and use the changes that come along to your advantage. The time to think about saving strategies is now, and we’re here to get you started with some retirement basics.
Establishing Retirement Goals—Your retirement goals embody how you envision daily life after you retire. When you’re job-free, how will you spend those hours, and where will you spend them?
- Will you take up a hobby like gardening or woodworking, for example? Hobbies require tools, equipment, supplies and a place that allows the associated activities. If you want to turn your hobby into a small business, what will be required?
- Do you plan on being a snowbird, splitting your year between two residences in seasonally temperate areas of the country?
- What will you have as a primary residence, and where will it be? Will you keep a full-sized home that may need repairs and updates, downsize to something smaller with less maintenance, or splurge on the hobby farm or beach property you’ve dreamed of owning?
- Will you want to relocate to be near family once you’re retired? That could mean moving to an area with a different cost of living, real estate values and lifestyle. If you’re following children, it could mean multiple moves and transitions.
- Is travel important to you? Travel costs can range widely—all-inclusive luxury international guided tour experiences versus modestly budgeted do-it-yourself domestic trips, for example.
- How important is discretionary spending? Will you want to be able to help children or grandchildren financially, for example? Do you have a bucket list of activities accruing for retirement?
- Will you work part-time or start a business of your own to supplement your income?
- If you wait to have children, will you have children entering college when you want to retire?
In short, how much will your anticipated lifestyle cost? While people often think they’ll be able to get by on less money once they retire, that assumption may not actually be true. Time that used to be spent earning money becomes time available to spend money. Many choices will require an initial or ongoing investment. Meanwhile, the cost of everything is likely to continue to rise.
Matching Retirement Ages and Social Security Benefits—While early retirement is a goal for many of us—the earlier, the better—the government has established rules regarding the retirement benefits associated with Social Security and eligibility to collect on them.
To qualify for a benefit, you’ll need to accrue at least 40 credits—about 10 years of earnings. Your benefits are then based on your total earnings records over the years. The longer you work and earn, the greater your benefits will be.
For anyone born in 1960 or after, you must be 67 to be able to claim your full benefits. You can continue to work and increase your benefits until age 70. If you retire early, you can begin to collect Social Security benefits as early as age 62, but they will be reduced. In addition, if you start collecting Social Security early yet continue to work and earn above a certain amount, your benefits may be further reduced. However, if you wait to collect your full Social Security benefits at 67, you can work without limitations that can cause payments to be withheld or reduced.
Calculating How Much Money You’ll Need—Much like when you were working, the income you’ll need in retirement depends on the type of lifestyle you want to maintain. What may be plenty for a person who is content with a frugal lifestyle may not be nearly enough for someone with greater appetites, a larger family, or more responsibilities.
Conventional financial advice recommends that you accrue retirement income representing 70 to 80 percent of your pre-retirement income. At its most basic, that translates into $70,000 to $80,000 of post-retirement income for pre-retirement income of $100,000, for example. In today’s world, that figure represents a conservative lifestyle.
Another way of calculating how much money you’ll need in retirement—as a lump sum—is to determine your current annual spending and multiply that figure by 25. The resulting figure should give you sufficient funds to maintain investment and withdraw about four percent each year to live on. The idea is that proper financial management will ensure that you won’t outlive your available funds.
To achieve these goals, experts recommend starting early and saving 15 percent of your gross annual earnings specifically for retirement.
Choosing Retirement Plan Tools and Options—Employers and financial institutions offer many ways to set aside the funds to maintain your desired quality of life during retirement.
• 401(k)s—Most employers offer a 401(k) plan to help you save for retirement. You can often allocate a certain percentage of your earnings toward the 401(k), and your employer may offer additional matching incentives. You typically have the option of allocating contributions among funds that provide varying levels of risk and return on investment.
Federal guidelines limit how much you can contribute each year. For example, in 2022, employees can contribute up to $20,500, and the combined contribution from employee and employer cannot exceed $61,000. You should take advantage of all matching funds—even if it's a bit of a pinch now. That’s money that can grow for the next 30 years or so.
To begin disbursements, you may be able to initiate withdrawals without penalty as early as age 55 if you retire or lose your job. Otherwise, the minimum required age for disbursements is 59½. You must begin taking at least minimum disbursements at age 72. Since 401(k) contributions are pre-tax funds, those withdrawals are subject to income tax.
• IRAs—Each year, you can set aside a maximum amount of money in an individual retirement account, or IRA. In 2022, for example, you can contribute up to $6,000. The money is tax-deductible in the year it's invested, and the investment’s growth is tax-deferred.
IRA disbursements can begin without penalty at age 59½. Make a withdrawal before that, and you’ll lose 10 percent in an early withdrawal penalty. You must take at least your minimum distribution for traditional IRAs at age 72. Withdrawals from traditional IRAs are subject to income tax.
• Catch-Up Contributions for IRAs and 401(k)s—Once you reach age 50, you can make catch-up contributions to further bolster your 401(k) or IRA. Limits for 2022, for example, allow employees to contribute up to $20,500 to a 401(k). However, those 50 or older can make an additional catch-up contribution of $6,500. For IRAs, you can deposit up to $6,000 a year, but those 50 or older can invest an additional $1,000 as a catch-up contribution for $7,000 for the year.
Planning for your retirement is a vital part of your working career. Having a strategy in place and sticking to it over the long term will mean that you’ll be able to retire in financial comfort and security whenever you plan to, want to, or need to. If you’d like assistance in establishing your personal retirement plan and maximizing your resources over time, reach out to us at La Cap. Our experienced financial experts can show you how easy it is to make retirement planning just another thing you do.