Did you know that less than 1/2 of Americans have calculated how much they need to save for retirement? In a study conducted by the government in 2014, it was discovered that 30 percent of private industry workers with access to a defined contribution plan (such as a 401(k) plan) did not participate. At the same time, the average American spends roughly 20 years in retirement. Planning for retirement is therefore an ESSENTIAL part of your financial planning and the earlier you start, the better.
Also, in order to live well in retirement, you no longer can rely solely on a company pension plan, your military pension or Social Security. Instead, you will have to depend on how skillfully you plan and invest, and whether you make good use of tax-advantaged savings plans such as 401(k)s and IRAs.
The first step involves figuring out an estimate how much you will need. One rule of thumb is that you'll need 70% of your annual pre-retirement income to live comfortably. That might be enough if you've paid off your mortgage and are in excellent health when you retire. However, if you have other goals like building your dream home, further education or any other goals you may have, you will need to save more. You will also want to think about your healthcare expenses.
There are typically three main sources of retirement income: Social Security, pensions and annuities, and your savings. You can find out how much you can expect to receive from Social Security with a quick estimate of about 40 percent of what you earned before retirement. You may be able to estimate your benefit by using the retirement estimator on the Social Security Administration website www.socialsecurity.gov or calling 1-800-772-1213.
Next, figure out any annual payouts you expect to receive from an annuity or company pension. If your projected retirement expenses exceed Social Security and pensions by, say, $20,000 a year, that means you'll need a nest egg of $300,000 to $400,000 (factor of $20 to every missing $1) to bridge the gap to account for inflation and other increases.
Your third and most important step is to save. Put money into an Individual Retirement Account (IRA). You can put up to $5,500 a year into an Individual Retirement Account (IRA). You can contribute even more if you are 50 or older. You can also start with much less. IRAs also provide certain tax advantages.
When you open an IRA, you have two options typically, Roth or Traditional . In some case, you are also eligible for a SEP account as well.
To enjoy your retirement fully, you will certainly want to have money put aside and planned for your living expenses for at least 20 years, the average life span of an American in retirement. Plan ahead and be prepared. Then you can enjoy a great retirement doing activities you love with people you care about on your schedule!