You spend your entire life working toward retirement, but what does that mean? Retirement isn’t a magic word for a savings account that appears once you hit the right age. It’s an action and requires effort. While you pay taxes toward Social Security that should come back to you when you retire, the reality is that safety net programs like that are never guaranteed. So what do you do to prepare for retirement? The news of changes coming to Social Security affects the 88% of retirees who depend on it for basic living expenses, and has many worried they didn’t do enough to prepare for this period of their lives.
This is something every professional should consider when they enter the workforce. It should shape where you live, the job you choose and how you save. But too many young professionals have a hard time playing the long game and prefer more money upfront when actually, a job that pays less with better benefits (like retirement) may be the better option. Retirement is a lot like high school – what you do in a short period when you’re very young can affect the rest of your life.Â
To help you fund your retirement and give you peace of mind about your future, we’ve put together a list of five fool-proof tips for preparing, listed in no particular order.
Why We’re Covering This
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As a company focused on personal wealth, we understand how important retirement is to the overall picture of your life. While it may not be something you consider often when you’re young, we want to help you find easy ways to increase your savings so you can enjoy the twilight years of life. The Department of Labor states that only half of Americans know how much they need for retirement, and we want to make sure our readers are included in that number.
1. Consider Your Age and Know Your Needs
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Experts believe you need 70-90% of your retirement just to maintain your standard of living, and the average American spends 20 years in retirement.Â
The things you do for retirement at 30 are different than those you do at 50. The time to decide how much you want in your retirement is when you first enter the workforce. When you invest young, your money has more time to grow. Consider what you want to do when you retire. Here are some great questions to ask yourself:
- Do you plan to relax at home with your partner and enjoy the quiet life, or do you have plans to travel?
- Do you want to have an inheritance to leave your kids?
- Do you plan to build a cabin or buy a vacation home?
- How much do you need to live each month, adjusted with the increase in cost of living?
- Will you own your house by the time you retire?
It’s recommended that you save 10-15% of your salary for retirement. This includes any investments made by your employer. We’ll explain that more later.
If you’re an older member of the workforce, it’s time to play catch up on your retirement savings. Reevaluate your investments, look into long-term care and plan for health care expenses. Consider diversifying your portfolio or consolidating your retirement accounts. If you can, meet with a professional to crunch numbers and make sure you’re on track to hit your goals.
2. Understand Your Employer’s Contributions
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The retirement conversation should happen with every job you consider. A company may offer you a high salary with poor benefits to make the job more enticing when the truth is that the benefits can outweigh the salary. Employers usually choose between a partial match and a full match.Â
If you have an employer who plans to match your contributions to a retirement plan, it should be figured into your overall salary when you’re weighing the pros and cons of the job. If your employer offers a 100%, dollar-for-dollar match, it means they will add one dollar to your retirement for every dollar you contribute. This means if you put in 5% of your salary, they put in 5% of your salary, although most companies do have a percentage limit.
Employers can offer to contribute any percentage, considered a partial match. A common formula is to offer $1 for every $1 contributed by the employee, then $.50 for every dollar up to that until a certain point. There are tax implications and limits on contributions for employers that they figure into a benefits package, so make sure this is a conversation you have with every job you’re considering. For example, retirement benefits are not part of your taxable income.
3. Decide How Much You Can Contribute
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As you can see, the amount you contribute affects a huge portion of your retirement. The more you save, the more your employer contributes. The money comes out of your paycheck before it’s taxed and you never see it, so it’s a convenient way to save without the option to spend more before it gets put away.Â
A good rule of thumb is to contribute 10% of your gross salary. Make sure your contribution meets the qualifications for an employer match, and consider any other savings accounts or assets you have at retirement. If you are unable to contribute much to your retirement, work toward a goal. The faster you reach it, the more the money grows.
It’s never too late to start putting money toward retirement. Don’t become discouraged if your account doesn’t look like you want it to.Â
4. Learn More About Social Security
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You pay taxes toward your Social Security account, which is a safety net set up by the government to ensure retirees have money long after they leave the workforce. You can’t pinpoint exactly how much you get from Social Security based on what you make, but the government has a calculator for those who sign up for an account. You can see exactly how much you’ve put into the program and exactly how much you can expect to get out.
5. Don’t Touch Your Retirement Savings
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You can borrow from a retirement savings plan, but there are consequences to doing so. You don’t get your money free – it comes as a loan and must be paid back with interest. You must also include the amount in your gross income the year that you get it, so it appears you made more money, increasing your tax liability. We recommend leaving your retirement accounts alone and looking for other avenues to borrow if it’s necessary because any money you fail to repay to your 401K is money taken from your retirement account.
Education Is Key
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Understanding retirement early is one of the best things you can do to prepare. Learning young allows you to make educated decisions about how much you contribute, where you put your money and even what jobs you take. Ask questions and do your research about basic investment principles, pension plans and Social Security. The more you prepare now, the more comfortable you’ll be later.
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