Retirement: Are You Ready?
Retirement: Are You Ready?
If you are anything like me, money and the prospect of financial independence, as I define it, is often on my mind. Retirement planning has changed dramatically in the last 80 years. As recent as the 1990s, it was common for someone to enter retirement years with a company-provided pension plan. While pensions still exist for some professions, government data shows only about 15% of private sector workers retire today with a pension. Those who are fortunate to have a pension may still benefit from personal savings and investments to bridge the gap between their lifestyle needs and the monthly income their pension provides.
The introduction of company sponsored retirement plans, such as the 401(k), changed the way people had to think and plan for retirement. Suddenly those who had no experience in the stock and bond markets were pushed into those markets with a portion of each paycheck. They were asked to make decisions about investment allocation and risk, deferral percentages, and how much they needed to save to provide for their income needs in retirement.
While tools to help you plan for retirement have greatly improved over the years, the topic can still seem overwhelming. Here are some common questions when it comes to retirement:
- How much of my paycheck should I be saving for retirement?
- How should my money be invested?
- How much do I need to accumulate to be able to retire?
- How do I avoid running out of money in retirement?
- How do I protect my family in my absence?
- When should I take Social Security benefits?
- How do I pass my assets to family or charitable causes efficiently?
This is the first in a series of articles where I will help answer these common retirement questions.
Let’s get started: How much should I be saving?
The answer to this question largely depends on when you started saving for retirement. As a Certified Financial Planner practitioner, I recommend that if you are starting to save for retirement in your mid to late 20s, aim for a savings rate that is at least 11% of your gross income. This includes any matching contributions you receive from a company retirement plan. For example, if Jane Smith, age 25, makes $50,000 per year and participates in her company’s retirement plan that provides 4% matching contributions, Jane needs to save at least 7% of her gross income, or $3,500 per year to meet her minimum savings rate goal of 11%.
If you begin saving for retirement in your 30s, that savings rate likely needs to be a minimum of 15% of your gross income. Whereas, if you start saving in your 40s the savings rate may need to be 20% or higher.
When it comes to wealth accumulation, there are three factors that influence how your money grows:
- Time horizon: How long your money can grow.
- Funding: How much is put into your investments each year.
- Investment return: The rate at which your investments compound from growth and interest.
Of these three, we have the greatest control over our time and funding. If you don’t begin saving until later in your life and are unable to dramatically increase funding, one solution is to extend the period of time your investments can compound simply by working longer or supplementing income in retirement with part time employment. No matter where you are in your career, it's never too late to plan for the future. Even if you never plan on retiring, the fact that the future is unknown is reason enough to save and invest.
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Disclaimer: Crosby Advisory Group, LLC is a registered investment advisor. This newsletter is for general knowledge and is not intended to be individual investment advice. Investing involves risk including potential for loss. Understand all risk and fees before investing. NMD Insurance is affiliated with Crosby Advisory Group, LLC.
