Though most people dream of the day they will be able to retire, preparing for that day can be daunting. Fewer than half of Americans have calculated how much they need to save for retirement.
In 2010, 30 percent of private industry workers with access to a defined contribution plan such as a 401(k) did not participate. The average American spends 20 years in retirement. With those statements in mind, it’s important to formulate a plan – and to do it sooner rather than later. Ankeny professionals are available to answer your questions about preparing for retirement and to get you on the road to saving for the future.
For most of us, getting started means figuring out a plan. Many people aren’t sure what they will need to have amassed in order to retire — or they aren’t even sure when they want to retire. Tracy Burt of Edward Jones says the first step in preparing for retirement is identifying the need.
There are many online resources for determining how much money you will need in retirement. Retirement is expensive. Experts estimate that you will need about 70 percent of your pre-retirement income — lower earners, 90 percent or more — to maintain your standard of living when you stop working. Most calculators take into account your age, your current financial status, your desired retirement age and length of your retirement.
“To get started, it is easy to get overwhelmed because people will go to the Internet, and there’s great information and tools, but there’s so much that it’s hard to sort through,” Burt says. “If you’re not working with a financial adviser, I recommend that you find someone you like and can explain investments in layman’s language and develop a plan.”
Sometimes the question is: What do you want to do in retirement? Sit down together and talk about it — figure out what you want your retirement to look like. Do you want to be closer to your children? Do you want to travel around the country in an RV? Do you want a vacation home in Italy? Or do you just want to maintain your current standard of living? If you don’t know what you want and what you need, you can’t formulate a plan to get there.
After you’ve formulated a plan, start saving. The amount you might need might seem daunting, but savings is the only way to get there. If you are already saving, whether for retirement or another goal, keep going. You know that saving is a rewarding habit. If you’re not saving, it’s time to get started. Start small if you have to and try to increase the amount you save each month. The sooner you start saving, the more time your money has to grow. Make saving for retirement a priority.
“Most importantly, it’s important to not quit investing,” Burt says. “Pay yourself first. When you develop your monthly budget, your monthly savings goal should be part of that. And every time if you think it’s not too hard to save, increase it.”
So you know you need to save, but save where? This is where some professional guidance can come in handy. Most experts agree the first place to get started is your employers’ retirement plan. Your taxes will be lower, your company may kick in more, and automatic deductions make it easy. Over time, compound interest and tax deferrals make a big difference in the amount you will accumulate. Find out about your plan. For example, how much would you need to contribute to get the full employer contribution, and how long would you need to stay in the plan to get that money?
Burt says the first thing to do is figure out if your employer has a retirement plan and if it matches contributions — that’s free money for you.
Vehicles like IRAs also offer another vehicle for savings. You can put up to $5,000 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 tax advantages.
When you open an IRA, you have two options — a traditional IRA or a Roth IRA. The tax treatment of your contributions and withdrawals will depend on which option you select. Also, the after-tax value of your withdrawal will depend on inflation and the type of IRA you choose. IRAs can provide an easy way to save. You can set it up so that an amount is automatically deducted from your checking or savings account and deposited in the IRA.
Brian Herbel of Edwards Jones says the biggest thing to remember is just get started — even if you’re not saying a lot yet, it’s best to save something.
“Investing isn’t about timing the markets, it’s about time in the market,” he says. “Don’t let recent headlines or the current situation hold you back. Some people are on the fence and put it off and don’t ever get started. Make some sacrifices. If you start now, you’ll know where you stand and can get closer.”
You also have to take into account how close you are to retirement. Goals can be adjusted. Check out different savings opportunities. Make modifications and look at all the opportunities that are available. Herbel advises people to do an assessment a few times a year to make sure they’re still headed down the right path.
“To stay on right track, review your portfolio and your risk level and your goals at least every six to 12 months,” Herbel says. “It’s helpful to have a team of financial professionals helping you make long-term decisions, like a CPA, attorney and financial advisor. Make sure they’re on the same page and can work together to implement your strategy.”
For many people in their 40s, retirement savings is important but the goal of paying for children’s college educations is also a reality. Herbel says people need to determine what they want to pay for college and how it will affect their retirement savings. While there are ways for students to get help in paying for college, there is no help when it comes to saving for retirement.
“Have a plan for retirement and for college,” he says. “Put majority of focus on retirement. Take care of yourself because as your kids get to college age, they can get loans and scholarships. You can’t. Establish some guidelines and be clear with your kids about what you’re willing to contribute.”
Another thing to remember, Burt says, is to always consider the source of your information and make sure you’re not making decisions based on broad generalizations, like what you might hear a professional on television say.
“People might hear something like, ‘The best thing is to put money in CDs,’ ” she says. “Well, the person who said that is older and getting ready for retirement soon, so it’s a different picture from someone who’s 30 or 40. No two plans will be alike. When I’m working with my clients, we start at the top and work down to the small details.”
Getting it done
Jim McDaniel says he and his wife decided they wanted to find a financial advisor in Ankeny to help them sort out their retirement plans when Jim decided to join his wife as a realtor four years ago. They quickly decided on Brian Herbel and have been very happy with his service and recommendations. They feel they’re on the right path to their retirement goals.
“I had a series of 401(k)s from other past employers that were just sitting there, and Brian helped us set up our 401(k)s for our company when we incorporated our business,” he says. “He wanted to do a risk assessment and see how far away we were from retiring and what type of investments we should be in and helped us figure out the big picture.”
McDaniel says when he was working in corporate jobs, he would take full advantage of employer-sponsored accounts like 401(k)s. Now his income is more commission-based, so it can be hard to budget much less plan for a certain amount to save each month for retirement.
“When it came to incorporating our business and investing long term, we just needed expertise and Brian was able to give us some custom advice,” he says. “If you need advice, seek it out now while you’re young. If you can invest just a little bit to get started, do it.”
Melissa Oborny says the biggest thing that has helped her and her husband achieve their goals is developing a comprehensive plan and looking it over frequently.
“Develop a plan and work toward your goals,” she says. “Check them over with your financial person. Keep an eye on those and change them as needed. It was having someone ask the questions and make us think about it that has made the difference.”