When you envision retirement, do you picture yourself living in a warm climate, traveling to exotic places, or doing whatever suits you on any given day? It might surprise you to learn that, regardless of your age or circumstance, a "lifestyle plan" is an important part of retirement planning.
Knowing how you want to spend your retirement years, where you might like to live, and which activities you plan to pursue is necessary in determining the total amount of cash you'll need. A general rule of thumb suggests that you may need 60% to 80% of your current income per year in order to maintain your current standard of living in retirement. If you find this figure surprising, you are not alone.
Many people think that Social Security will provide a large portion of their retirement income. However, Social Security was designed to be a supplement to retirement savings, rather than a primary source of income. To estimate your Social Security benefits, obtain a Social Security Statement (SSS) from the Social Security Administration (SSA) online at www.ssa.gov. Or call 1-800-772-1213 and ask for Form SSA-7004, Request for Social Security Statement. By obtaining a copy of your statement, you can check for errors that might affect your payout later, learn the amount of your expected payout, and determine the amount of income you may need to supplement your desired lifestyle.
Since Social Security provides only a portion of needed income, many people rely on savings to make up the difference. Yet, according to the 2010 Retirement Confidence Survey conducted by the Employee Benefit Research Institute (EBRI, 2010), only 60% of workers report that they or their spouse are currently saving for retirement. Moreover, less than half (46%) have tried to calculate how much savings they will require in retirement, and 54% report that the total value of their savings, excluding the value of their home and pension, is less than $25,000. Only 29% of workers expressed confidence about the likelihood of having sufficient financial resources to pay for basic expenses during retirement.
With the decline of traditional pensions and the uncertain future of Social Security, individuals have become increasingly responsible for funding their own retirement, but according to these statistics, many have yet to take that important first step.
Taking the First Step
Starting a retirement savings plan may be a lot easier than you think. In fact, the first step is often to accept "free" money in the form of your employer's benefits. This may include a traditional pension, also known as a defined benefit plan, that your employer contributes to on your behalf, which is then payable to you upon retirement.
Currently, a more common benefit option is a defined contribution plan, such as a 401(k). 401(k) contributions are deducted from your paycheck before taxes, and they have the potential to grow tax deferred. Your employer may match your contributions up to a certain percentage of your salary. But first, you have to take some initiative. In order to fully benefit from the matching contribution, you must make contributions.
Because contributions are deducted from gross pay, they may have a relatively minor impact on your net income and can be of great benefit to your overall nest egg. For example, saving $5,000 today, over a period of 15 years, at a hypothetical 5% rate of return, could amount to over $10,569 in additional savings income.
Individual Retirement Accounts
In addition to employer-sponsored plans, many people are contributing to Individual Retirement Accounts (IRAs) to save for retirement. Traditional and Roth IRAs allow for annual contributions of $5,000 for 2011. In addition, for those age 50 and older, annual "catch up" contributions of $1,000 are allowed. Funds in both accounts will be subject to a 10% Federal income tax penalty if distributions are taken before age 59½. However, certain exceptions may apply.
Depending on your income and participation in an employer-sponsored plan, contributions to a traditional IRA may be tax deductible, and earnings have the potential to grow tax deferred until you retire. Contributions to a Roth IRA are made after taxes, but withdrawals are tax free in retirement, provided you are age 59½ or older and have owned the account for at least five years. Saving as much as you can each year can have a significant impact on your ability to reach your retirement goals.
You can achieve your retirement goals and live the lifestyle you desire, if you develop a game plan. Take time now to evaluate your resources, set retirement goals, and take the necessary steps to reach them.