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One of the best things you can do for your financial future is to start preparing for retirement as early as you can. Unfortunately, not very many Americans are getting ready for retirement. Indeed, according to a report from the Federal Reserve, 31 percent of Americans have no retirement savings at all.
Not only that, but less than half of Americans have even assessed their retirement needs. Are you one of those with no retirement savings and no idea of how much you need to retire? (Here are some suggestions that will help.)
This is a serious issue for many people right now, and it’s important that you prepare as early as you can – or you might be stuck without sufficient assets later on. Inflation, health care costs as you age and other issues can slow your finances down. Now is the time to prepare for retirement, or you could be in trouble later.
Figure Out What You Need
Too many Americans aren’t adequately preparing for retirement. In fact, an alarming number don’t even know how much they will need in retirement. As a result, too many people probably aren’t setting aside enough money for their retirement needs.
It’s tempting to think that the $200 you’re setting aside each month will be enough to fund your golden years, but the reality is that it probably isn’t going to cut it. You will likely need to set aside a lot more for retirement – unless you happen to be a teenager right now.
So how do you know how much you need?
First of all, you need to set time aside to figure it out. This calculation is different for everyone, depending on individual choices and lifestyle preferences. How much you need to retire will depend on what you want to do, as well as your current situation.
Think about how much you spend now, and whether or not you will spend the same amount in the future. You should also consider whether you will downsize, or if you will move to a different location. Think about how long you plan to work, or whether you plan to get other types of revenue during retirement. All of these factors are important details to know about when you calculate how much you will need during retirement.
And be realistic when you evaluate where you stand right now. You will need this information to be as accurate as possible if you want to create a strategy that allows you to set aside what you need for the future. That’s why a budget, even though it’s boring to maintain, is a great tool. It allows you to quickly see how much money you are spending and which spending categories your cash is going to so you can estimate much more easily what your retirement needs will be.
Start Saving
Don’t wait for another day and start putting money aside for retirement now if you haven’t already done so. Even if you haven’t performed a needs assessment, you need to start saving. Then, once you have gone through your retirement needs assessment, you can make adjustments (and chances are that you will need to make changes).
And consider the whole family in your plan. If you have a life partner, you should consider setting aside money for him or her as well. Figure out how much you need to set aside each month to reach your goals, and then work up to that level of contribution.
Remember to make good use of retirement accounts.
Open a tax-advantaged retirement account and start putting money into it. It’s even easier if you have an employer-sponsored plan, like a 401(k) or 403(b) at work. That way, you have a chance to have the contributions automatically taken care of.
These types of accounts are great, especially if you use some sort of automated type of investing. However, you still need to be careful. Once you set your account on automatic, it’s easy to forget to invest more later on. As you receive raises, or if your household income grows because of a partner’s new job or your new side business, it’s easy to forget to increase the amount that you are saving.
If you haven’t increased your retirement account contributions to keep pace with your income growth, you probably aren’t saving enough for retirement. You need to re-evaluate your savings each year. If you get a three percent raise, you should also make a three percent (or more) increase in the amount of money you set aside for retirement. At the very least, your retirement contribution growth should mirror your income growth.
Be Careful of Compound Growth
Compound interest is powerful, but it’s dangerous too because it’s not a miracle. You need to give interest something to work with. This means you need to keep adding capital. Compound interest works better over time, so if you start much younger, you can get away with setting aside a couple hundred dollars a month for retirement.
The truth for those who are well into their careers, though, is that it doesn’t work quite as nicely. You aren’t going to meet your goals if you set aside $200 a month. You probably need to set aside much more a month if you are getting a late start. The closer you are in retirement, the more you’ll need to “make retirement.”
Don’t expect your investments to “save” you. Plan on a conservative annualized return of between five and seven percent, rather than optimistic projects of between 10 and 12 percent. You’ll have a more realistic idea of what to do, and realize that you probably need to save more.
Once you face reality and get started with your investment plan, you will be more likely to accomplish your retirement savings goals.
And don’t be discouraged. Even if you can’t put in as much as you would like to right now, don’t be one of that 31 percent who doesn’t have anything set aside. Start today to save for retirement, and as your finances improve, you can boost your contributions. Over time, you will improve the size of your account, and you will be happier – and better prepared financially.
Editor’s Note: I’ve begun tracking my assets through Personal Capital. I’m only using the free service so far and I no longer have to log into all the different accounts just to pull the numbers. And with a single screen showing all my assets, it’s much easier to figure out when I need to rebalance or where I stand on the path to financial independence.
They developed this pretty nifty 401K Fee Analyzer that will show you whether you are paying too much in fees, as well as an Investment Checkup tool to help determine whether your asset allocation fits your risk profile. The platform literally takes a few minutes to sign up and it’s free to use by following this link here. For those trying to build wealth, Personal Capital is worth a look.