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Retirement can be far off for you, but planning for it takes decades. You may think that you do not have to worry about retirement at the age of 20 or 30, but the longer you wait, the more difficult it will be to save enough because your savings have less time to retire. enjoy compound growth.
It's never too early (or too late) to start planning for retirement. Here are three key steps that you should follow now if you have not already done so.
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1. Create a retirement plan.
In order to know how much you need to save for retirement, you need an estimate of how much you are going to spend in retirement. Begin by estimating how much time you will live. The average life expectancy in the United States is 78.6 years, but one in 65 years will live beyond 90 years, and one in seven will live beyond 95 years, according to the Social Security Administration, you will want may be high if you are reasonably healthy. Then subtract your expected retirement age from your estimated life expectancy to obtain the approximate duration of your retirement.
Then estimate your annual living expenses. Add up all the costs you expect to have in retirement, including housing, utility bills, grocery shopping and health care costs. Some of the expenses you have today, such as child care expenses, may disappear in retirement, while other costs may increase.
Once you have obtained your estimate of your annual retirement expenses, multiply it by the number of years of your retirement. You must add 3% per year for inflation, which can do a retirement calculator. It should also give you an estimate of what you need to save per month and overall to reach your retirement goals. This amount varies depending on what you choose as the rate of return on your investment. If you are trying to be conservative, use a rate of return of 5% or 6%.
Finally, take your target savings number and subtract the amount you expect to receive from other sources, such as a 401 (k) Employer Match or Social Security, to determine how much you need to save on your own. You can estimate your social security benefits by creating a my Security account.
The age at which you start taking social security is also important. If you want 100% of your scheduled benefits by check, you must wait before you can start claiming benefits until you reach your retirement age (FRA) of 66 or 67 depending on your year of birth. You can start claiming benefits as early as age 62, but if you do, you will receive only 70% or 75% of the scheduled benefits, depending on your FRA, to reflect the additional months you receive.
You can also defer benefits beyond your FRA and your checks will increase until you reach the maximum benefit of 124% or 132% of the scheduled benefit by check at age 70. It's up to you when to start collecting Social Security benefits, but if you plan on living long enough, it's better to defer benefits if you can, so you can get larger checks. This will reduce the pressure on your personal retirement savings.
2. Open a retirement account and start contributing.
If you do not have a retirement account yet, open one. You may be eligible for a 401 (k) by your employer. Otherwise, you can open an individual retirement account.
You can contribute up to $ 19,000 to a 401 (k) in 2019 or $ 25,000 if you are 50 or older. In comparison, you can only contribute $ 6,000 to an IRA in 2019 or $ 7,000 if you are 50 or older. If you have a 401 (k), your employer can match some of your contributions, reducing the burden on you to save for retirement. ARIs do not offer this option, but they can remain valuable tools for retirement savings because they often charge fees lower than 401 (k) s and you have a range of choices investment funds, including stocks and bonds, mutual funds and exchange-traded funds (ETFs), annuities and real estate.
If you choose an IRA, you must also choose between a traditional and a Roth IRA. Because traditional IRAs are tax-sheltered, your contributions reduce your taxable income this year, but you pay taxes on your distributions when you retire. The Roth IRAs work in the other direction. Your contributions will not reduce your taxable income this year, but after you pay taxes on your initial contributions, they are no longer taxable. Most 401 (k) s are tax-deferred, but employers are increasingly offering 401 Roth (k) s to individuals who wish to take advantage of the Roth IRA benefits while maintaining the highest contribution limits of the 401 (k) s. (k).
Generally, you should contribute to tax – deferred accounts if you believe you are in a higher tax bracket today than will be your retirement. Contribute to Roth accounts if you believe the opposite is true. Or you can contribute to everyone.
If you can, contribute as much as your retirement calculator tells you each month when you set up your retirement plan. If you can not contribute so much today, do as much as you can and try to increase your contributions by 1% per year until you reach the amount of your goal. If your employer offers a 401 (k) match, contribute at least enough to get the full match and enjoy the free money.
3. Familiarize yourself with the expenses of your retirement account.
There is a charge for all retirement accounts, although you may not be aware of this because they are directly deducted from your retirement account. Over time, this can reduce your profits. For fees, contact your plan administrator or read your plan summary or your investment prospectus. Ideally, you do not want to pay more than 1% of your assets in fees each year.
Your plan may charge an administrative fee for transactions such as keeping or deferring records, as well as fees for specific investments or transactions. For example, mutual fund expense ratios – an annual commission – for all shareholders. In general, the 401 (k) charge higher fees than ARIs, and small firms charge higher fees than larger ones because they have fewer employees to divide their administrative costs, but this is not the case. not always true.
If you pay more than 1% of your assets annually for fees, consider moving your money to low-cost investments, such as index funds. They are mutual funds that follow a market index and are known for their strong returns and low expense ratios. Alternatively, you can move your money from your 401 (k) to an IRA to reduce your expenses. But if you get an equivalent number of employers enough to cover your 401 (k) fees, you would probably do better to leave your savings where they are to enjoy the free money.
By following these three steps, you'll be well on your way to retirement, but remember that your retirement plan is changing. Every few years, review your plan to make sure it's still adequate. If your lifestyle or retirement goals change, you will need to update your plan to reflect this.
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