Generally speaking, financial experts say you’ll need 70% of your annual pre-retirement income in order to maintain your standard of living in retirement. That statement may have you wondering when you should begin saving, and the simple answer is now. As with any big project, it’s easy to become overwhelmed when you look at the big picture. However, by breaking your retirement savings goal into manageable steps no matter when you start, you’ll find that the process becomes less intimidating. In fact, armed with information you gather along the way, we even propose that the process can be an exciting adventure! It’s USC Credit Union’s goal to be your financial partner for life and to empower you to own your future. Let’s get started!
When you’re in your 20s and just starting your career, it’s almost impossible to determine what your living costs might be in 40-plus years. That’s ok. For now, rather than striving to reach a certain monetary goal, it’s important that you begin developing smart spending and saving habits. So, if you’re earning any income at all, consider dedicating a small portion to your future. Here are a few guidelines to consider as you’re starting out:
• Start small. Aim to save as little as $25 per pay period or as much as 2-5% of your salary. Make this an automatic payment from your paycheck and budget your expenses on the remainder.
• Grow your savings as your salary grows. Increase your savings 1% each quarter, each year, or as you change jobs.
• Bank your bonus.
• Don’t walk away from free money. Take full advantage of any retirement plan your company offers, especially if they offer matching funds.
• Put your money to work for you. If you start saving now, your retirement nest egg will reap the benefits of compound earnings. Your contributions will earn dividends, which is money that can be reinvested for the opportunity to earn even more.
To see the benefit of compound earnings, here is an example of two savers: Susanna and Mark. Susanna started saving when she turned 25, banking $3,000 a year for just 10 years. She chose to stop saving after her first 10 years of investing. Mark started saving at age 35, also banking $3,000 each year, but he saved for 30 consecutive years.
Thanks to compound earnings, Susanna is enjoying an extra $105,000 and she only saved for 10 years. Imagine what her account statement might reflect if she chose to continue saving for an additional 20 years!
If You’re in Your 30’s or 40’s
If you’re just getting started saving, it’s definitely not too late! In fact, with some discipline and focus, you can still make great strides in claiming a very comfortable retirement.
The general advice at this point is to try to save between 10% of your gross income and your 401(k) contribution limit (which changes each year, but even 2013’s limit of $17,500 is an ambitious goal). If you’re already contributing to your 401(k), increase your contribution. Because your contributions are pre-tax, you won’t see a “dollar-for-dollar” impact on your paycheck. And by all means, continue to take advantage of employer matching if you’re fortunate enough to work for a company that offers it. A few other suggestions for these decades:
• Revise your budget. Don’t have one? It’s time to make one! Don’t just guess where your money
is going. When you know for sure, you can make informed choices and changes.
• Revise your spending and saving habits. Take a hard look at your budget and see where you may
be able to trim a little here or there and redirect those funds to your retirement savings.
• Reestablish your financial priorities. You may have a few sizable assets by this point in your life, along with some hefty financial obligations, such as a mortgage, cars, and perhaps some debt. Devise a strategy to simultaneously chip away at debt while continuing to save.
If You’re in Your 50s-60s
These are the years you’ll want to take a good, hard look at your retirement goal, assess how close you are to meeting it, and what needs to change for you to reach your goal within your timeframe. Keep in mind that the money you’re saving isn’t for a rainy day; these finances will fund your retirement—meaning that your standard of living can increase, decrease, or stay the same depending on your self-discipline and your priorities.
Consider what you want your retirement to look like: will your day-to-day activities remain basically the same? Do you want to travel, give philanthropically, fund a start-up, or purchase a vacation home? Will you sell your current residence and downsize? Buy a new car or keep your current one? You’ll probably be making lots of changes when you retire, so your income and expenses might be wildly different from what they are now.
Create a potential budget, allocating funds for the likelihood of increasing healthcare costs. You can determine how much you’ll need and how close you are to reaching your goal by using a retirement calculator. Remember to factor in inflation, your rate-of-return assumptions, Social Security projections and other important factors to get an accurate snapshot of your real financial needs. And don’t be afraid to reach out for assistance—financial planners are extremely helpful!
Some additional suggestions:
• Increase your retirement contributions. If possible, aim for 15% or more of your income.
• Adjust your asset allocations, if necessary.
• Weigh the pros and cons of early retirement. It will free you up to enjoy more time, but will
reduce your Social Security benefits.
• Consult a tax advisor. How you take distribution of your funds can impact your tax bill, and you’ll
also want to avoid paying unnecessary penalties.