One of the joys of retirement is sitting back and enjoying the fruits of your long years of labor. Retirement offers you the chance to try new things and go new places, but only if you are adequately prepared. As you get started with financial planning, it is important to keep retirement in the front of your mind. In order to retire comfortably, you’ll need to have a comprehensive retirement plan in place that ensures you have adequate sources of income to meet your living expenses and maintain your desired lifestyle. Still curious about the importance of retirement planning? Keep reading to learn more.
Creating the retirement you dream of doesn’t just happen magically. You’ll need to ensure that you have revenue streams available that allow you to transition painlessly into your post-retirement life or even retire early. Retirement changes a lot of things, from income sources and taxes to health insurance coverage and healthcare costs. Despite the importance of creating a retirement plan, many people end up not saving for retirement. This leaves them in a difficult position once they reach retirement age, and in many cases forces individuals to stay employed long after they are ready to retire.
One of the key factors affecting retirement savings is how early you start saving for retirement. There are many benefits of saving for retirement early, some of which are clear and some of which you may not have considered yet. In this article, we’ll explore why saving for retirement early is essential for creating financial stability in your post-retirement years and achieving your retirement goals. Creating and implementing a retirement plan early lays the groundwork for robust retirement savings.
The Problem With Waiting
It can become all too easy to keep putting off saving for retirement. Many young people lack the income to begin maxing out their contribution to retirement accounts early in their career. Because of this, they put off saving for retirement until they are more established financially. While there is no doubt that when you are young you may have a difficult time saving for retirement, it is important to keep in mind that you should still be contributing as much as you can to your retirement savings so that you can achieve your long-term goals.
If you are young, you may look around or talk to others and realize that not many people your age are saving money for retirement. The truth is, you may have a difficult time finding someone at any age that makes a serious effort at saving for retirement. A report by the Economic Policy Institute found that nearly half of the families in the United States had no retirement savings accounts at all. The mean retirement savings account for families of working age, defined as 32-61, was only $95,776. While this may seem low, the actual numbers paint a far worse picture. When we look at the median retirement savings, or rather the 50th percentile of retirement accounts, the extreme lack of saving for retirement becomes crystallized. The median retirement savings of families aged 32-37 was only $480, while the median retirement savings of individuals approaching retirement was only $17,000.
When you talk to people about their savings goal for retirement, one of the common responses is that they will rely on social security. While social security is the single most common source of income for individuals over 65, with roughly 82% receiving benefits, the median benefit amount is only $14,400. To put this figure in perspective, social security benefits amount to less than what an individual makes working full-time at minimum wage. Now take some time to consider how much your income is now, and how much it would cost to maintain your current lifestyle. Will $14,400 cover it? Probably not.
Roughly 30% of individuals in retirement receive some type of pension benefit throughout their retirement years. Pensions, otherwise known as a defined benefit plan, were utilized heavily as a retirement vehicle in the past but their popularity has been waning since the adoption of defined contribution plans like 401(k)’s. If your employer offers a pension, you might think that your lifestyle will be maintained through retirement. Yet, the average pension benefit for individuals in the United States is slightly less than that received through social security at $13,200. You might be able to rely on this to supplement your social security, but is it enough?
If these numbers are startling, they should be. It is alarming how inadequately most Americans fail to save for their retirement. It is understandable that there are other financial goals that many people have, particularly early in their career, that result in a delayed contribution to a retirement savings plan. Despite this, it is still important to begin contributing early.
To highlight this, consider a scenario where there are two individuals. The first individual contributes the maximum amount to their retirement savings account each year for the first ten years of their career and then never contributed anything else. The second individual does not contribute during those ten years but contributes the maximum amount allowed for the remaining 33 years that they work. Which person would have larger retirement savings in the end? Most people would answer that the individual who contributed for a longer period of time would have larger retirement savings, but this would be incorrect. In fact, the first individual would have larger retirement savings. This is due to the power of compound interest and highlights the incredible importance of beginning your retirement savings plan early.
How Much Should You Be Saving?
Some individuals may desire to save for their retirement but aren’t sure how much they should be saving. This is a highly individual question and must incorporate a number of factors, including where you live, when you want to retire if you are saving for other things like paying for your children’s education, and what types of revenue streams will be available to you during retirement. At a basic level, you should be saving as much as you can throughout your prime working years to prepare for retirement. At the same time, this doesn’t fully capture the complexity involved in determining how much you will need to save in order to be comfortable during retirement.
Determining your financial needs into retirement can be especially difficult. It is always difficult to make an assessment of future costs, particularly when you have no real guarantees that the future you envision will come to pass. However, that doesn’t negate the importance of getting a basic understanding of what your costs will be during retirement. In order to produce the most accurate assessment of your expenses during retirement, it is recommended that you begin working with a financial planner. A financial planner can help you quantify what your projected costs will be, and help you create a budget that allows you to build a retirement portfolio that is adequate to meet those costs.
If you are attempting to figure out how much money you need to save for your retirement, you may be forgetting to factor in two key considerations. The first is that healthcare costs may be substantial during your post-retirement years. The second is that people are living much longer than they were before, which forces your retirement savings to last for a longer period of time. You’ll need to carefully weigh both of these factors when assessing how much you need to be saving for retirement. For individuals retiring today, the average healthcare expenses you can expect during retirement will total $280,000. This is far more than the average retirement account balance many Americans enter retirement with, highlighting the importance of taking the time to accurately assess your healthcare costs as you enter retirement.
Once you transition away from an employer-sponsored healthcare plan, you will most likely enroll in some type of Medicare program. This can alter how much you are paying for healthcare when compared to your current health insurance. On top of this, your healthcare costs will naturally rise as you age. If you have any special health considerations, this will also have an impact on your projected healthcare costs during retirement.
Projected healthcare costs are just one factor that should be considered when determining exactly how much you need to be saving for retirement. Working with a financial planner is essential to producing a retirement portfolio that is capable of supporting you throughout retirement. You will need to factor in other sources of revenue, such as social security and passive income streams as well, as these can be an important part of a retirement portfolio. Working with a financial advisor can give you a concrete figure that allows you to create the savings you need to transition into retirement when you hit full retirement age.
Advantages to Starting Early
There are a number of benefits associated with saving for retirement early. Let’s start with the low hanging fruit. As our example between an early saver and a late saver illustrated, starting a savings plan early will result in a much higher retirement portfolio for you and your family. This is a boon for individuals that desire to maintain their current quality of life and lifestyle throughout retirement.
Starting a retirement savings plan early will also give you greater flexibility in how much you contribute to your retirement fund. Individuals that start saving early will have to contribute more in order to achieve their goals, while individuals that begin saving earlier in their life will have much greater flexibility in determining how much they contribute as they age. The key here is how this factors into other financial decisions in your life. If you want to build a real-estate portfolio to generate passive income during retirement, it can be difficult to achieve if you are contributing a larger percentage of your income into your retirement account.
An added advantage of implementing your retirement savings plan sooner rather than later is that it allows you to ride out volatility in the market. Market volatility is a constant worry for individuals who are eyeing their retirement account and nearing their retirement date. If you begin early, this volatility will still affect you, but over the long-term, your portfolio will continue to grow. This is a key difference between long and short-term investments. While short-term investment strategies can produce short-term growth, it can also result in substantial losses. When saving for retirement you want security, and a long-term investment strategy puts you in the best position to ride out any short-term volatility. If you are just beginning to save and you are much closer to your target retirement date, market volatility can be much more detrimental to the value of your portfolio. This highlights the importance of beginning to save as early as possible.
Create a Comprehensive Retirement Plan
If you aren’t saving for retirement already, now is the time to start. You’ll want to create a comprehensive financial plan that includes your goals for retirement along with other financial goals you might have. To do this, it is recommended that you work closely with a financial advisor that can help guide your financial decisions. A financial advisor can work with you to create a budget that incorporates your short and long-term financial goals and charts a course for you to realize your goals over time.
One mistake individuals make when considering retirement is to rely solely on social security or a pension. Don’t make this same mistake. While social security or a defined benefit plan can be an important part of your retirement portfolio, it is often necessary to supplement this income with revenue from other income streams. Whether this is from a defined contribution account like a 401(k) or from other passive income streams like real-estate, it is important to understand exactly how you will be funding your retirement.
Take the time now to create a comprehensive retirement plan. This will give you a full picture of what your income looks like during retirement and what your expenses look like during your post-retirement years. Through this, you can work with a financial planner to generate insights into realistic ways to make your long-term financial goals a reality while still achieving the quality of life you desire during your working years. Remember that with retirement savings specifically, if you start early time is on your side. Investment strategies and overall asset allocation are also important but don’t forget to use your time wisely to begin laying the foundation for your post-retirement years.
* While the information presented herein is believed to be accurate, Bull Oak Capital LLC (Bull Oak) makes no express warranty as to the completeness or accuracy, nor can it accept responsibility for errors appearing in the document. Bull Oak is under no obligation to notify you of any errors discovered later or of any subsequent changes in opinions. Nothing herein should be construed as a recommendation to buy or sell any of these securities. It should not be assumed that any of the securities, transactions, or holdings discussed will prove to be profitable in the future or that investment recommendations or decisions Bull Oak makes in the future will be profitable or will equal the investment performance of the securities discussed herein. Bull Oak or its employees may have an economic interest in securities mentioned herein.