Fact Checked by: Kevin Hamilton
Last Updated: August 24, 2022Advertiser Disclosure
Fact Checked by: Kevin Hamilton
Last Updated: August 24, 2022Advertiser Disclosure
If monthly bills are the stick prodding you to work every day, then retirement is the carrot.
Sure, at times that sweet root vegetable feels so far away. Preparing for retirement can be overwhelming when you’re still trying to save up to buy a home or send your kids to college.
But with a little guidance and the right information, you’ll find yourself on the right track to enjoy all the fruits (and veggies) of your labor.
Sadly, there’s no magic number for retirement savings. Your individual situation — income, tax bracket, cash flow, dependents, desires, debt — determines what your retirement will cost.
You may have heard you should aim to have $1 million in savings and investments set aside. But that may be too little or even too much depending on your individual needs.
Many people who plan their own retirements don’t factor in their post-retirement tax situation. For example, if a person’s income drops from $80,000 to $50,000 once they retire, their tax bill will be suitably slashed.
And even though you can’t rely on Social Security alone, it can really help fill in the gaps.
So while we can’t give you a magic number, it’s not as hard as you might think to put yourself on the right path.
Brent Weiss, a certified financial planner and co-founder of Facet Wealth, says you don’t need to make large, sweeping changes to start effectively saving for retirement.
Weiss suggests taking a 1% approach: Begin by putting aside 1% of your income and slowly adding on another percentage point every six to 12 months. Before long, you’ll have a solid nest egg set aside.
"Most people will tell you to make very big changes in your life to ultimately retire well, but I think it’s actually about these incremental, imperfect, but implementable changes you can make."Brent Weiss, Facet Wealth
Seniors can get a maximum of $3,345 a month from Social Security. But what’s the average amount, as of spring 2022?
Before you can start saving for retirement, you’ll have to decide what type of account suits your investment needs. If you’re lucky enough to have access to a workplace account, that’s often a great place to start.
With a traditional pension, your employer invests money on your behalf in a “defined benefit plan.” That means it provides you with a specified payment — in the form of monthly checks or a lump sum — upon your retirement.
Unfortunately, pensions (and defined benefit plans especially) are less and less common in the private sector these days.
You’re more likely to have access to a 401(k), a type of “defined contribution plan.” That means your benefits in retirement are determined by how much money you contribute.
These plans allow your employer to contribute to your retirement — often by matching a portion of the money you put in — without having to take on the responsibility of making the decisions and guaranteeing a payout.
Some 401(k) plans don’t offer employer matching, but they can still be worth it for other perks, like a tidy tax break and a generous contribution limit.
If you’re going it on your own to save for retirement, then an individual retirement account, or IRA, is probably the vehicle you want. The two most popular IRAs are traditional and Roth accounts.
A traditional IRA is a "pre-tax" investment account.
You make contributions from your income before taxes are taken out, and the money grows tax-free until you withdraw it in retirement.
Since you're likely to find yourself in a much lower tax bracket in retirement than during your working years, putting money into a traditional IRA can be a great way to save on taxes.
Many types of investments are OK inside an IRA, including stocks, bonds, ETFs and mutual funds.
Roth IRAs, unlike many other retirement savings plans, are funded with money that’s already been taxed.
So while you won’t get a tax writeoff upfront, that means your withdrawals later on will be tax-free.
And unlike a traditional IRA, Roth accounts don’t have mandatory withdrawals. You can leave the money untouched for as long as you like, making this account one of the most flexible options out there for retirement savers.
Want to learn more about the magical world of retirement? Shake the sphere for eight financial facts.
For fun retirement facts
If your employer offers a matching 401(k) retirement plan, you’ll almost certainly want to take advantage of this perk.
The most common employer match formula, according to the American Society of Pension Professionals & Actuaries, is 50 cents per dollar, up to 6% of your pay.
Every cent your work contributes to this account is as close as it gets to free money, so you’ll want to ensure you get as much of it as possible.
Plus, 401(k) plans are tax-deferred, just like traditional IRAs. A part of your paycheck goes directly into your account before income taxes are taken out, and that money grows tax-free until you withdraw it in retirement.
Here’s how to make sure you’re maximizing your 401(k) employer contributions:
A common rule of thumb for long-term investing, including for retirement, is known as the 60/40 rule.
The idea is that you put 60% of your investing dollars into stocks, so you’ll have enough growth potential to meet your goals. The other 40% goes into bonds, to provide a stable source of income to fall back on in case your stocks don’t perform.
But many financial advisers have been getting away from the 60/40 rule because bond yields today are minuscule compared to the interest rates of yesteryear.
And the problem with rules of thumb is they don’t adapt well to different investing needs. Those who have a longer time horizon (meaning more years until retirement) may want to consider a riskier mix with more stocks, while those with shorter time horizons might decide to take on less risk to preserve as much of their wealth as possible.
Of course, the right mix for you is best determined with some help from your financial adviser and should be updated when you pass a new life milestone, like accepting a big promotion, getting married or having children.
To understand why it’s important to diversify and adapt your investment strategy to your risk tolerance and time horizon, it’s helpful to have a visual of how different assets have performed over the last 35 years.
These calculations, courtesy of Brent Weiss and the Bloomberg Terminal, include “nominal” (not adjusted for inflation) and “real” (adjusted for inflation) returns on an initial $2,000 investment 35 years ago.
The Social Security retirement age is 62, which means you can start receiving your benefits then, but you’ll only receive partial payments.
To get the full amount, you’ll have to hold off until you reach the full retirement age. That age depends on the year you were born.
For people born between 1942 and 1954, the full retirement age is 66. For those born between 1955 and 1960, the full retirement age gradually increases until it reaches 67.
Everyone born in 1960 or later will have their full retirement benefits kick in at age 67.
Social Security is an important source of retirement income for millions of Americans.
The average income among households where at least one person is 65 years old or older was just over $44,000 in 2017, according to the most recent Census data available.
Social Security typically makes up the highest proportion of that income, at an average of $16,560, followed by earnings at $13,950.
But as you can see, it’s not enough to live on on its own.
There’s no guarantee Social Security will be around forever. In September 2021, the federal government disclosed that a key source of cash is expected to come up short by 2033.
The Treasury Department oversees two funds that provide income for the Social Security program: the Old-Age and Survivors Insurance Trust Fund and the Disability Insurance Trust Fund.
While the funds going insolvent has been a concern for years, the COVID pandemic made the situation worse. Social Security is financed through a dedicated payroll tax, and a steep drop in employment shrunk the government’s revenue.
After 2033, the Old-Age and Survivors Insurance Trust Fund will only be able to pay out 76% of the scheduled retirement benefits, based on the revenue it expects to bring in.
The federal government has a number of options to right the course. In addition to raising taxes or cutting benefits, it could raise the retirement age, cut the annual cost-of-living adjustment or make other tax changes.
While you’ll likely receive some income from Social Security by the time you retire, the smart move may be to plan like you won’t have it at all.
Once you’ve got your retirement accounts set up and a plan is starting to take shape, you may start to wonder how much you can spend on an annual basis.
One rule of thumb that has guided the financial industry for nearly 30 years is known as the 4% rule.
Rookie adviser Bill Bengen came up with the rule after studying several decades’ worth of statistics on stock and bond returns, asking himself whether retirement portfolios from that time period could theoretically last up to 50 years.
He found that the answer was generally yes, if retirees withdrew no more than 4% of their assets per year. And in any case, they could reasonably expect their funds to last 30 years.
The problem is you have to stick to that 4% every year, no matter what. And that makes the rule unrealistically rigid for many people. Even Bengen himself has been compelled to revisit it to update it.
That’s because his original research only included two asset classes: Treasury bonds and large-cap stocks. By taking into account a third class, small-cap stocks, he now believes that 4.5% would be a safe withdrawal. Maybe even 5%.
That being said, most hopeful retirees would be best served by consulting with their own financial adviser about the withdrawal strategy that best suits their financial situation.
It may surprise you, but the first retirement plans didn’t bank on many citizens making it to retirement age.
Otto von Bismarck, chancellor of Germany, rolled out his radical idea of caring for citizens when they were too old to continue working in 1881. However, many Germans still worked until they died — especially when you consider the retirement plan only kicked in at age 70 and German life expectancy at the time was under 40.
But are you dreaming about leaving the workforce while you’re still young and spry?
The average retirement age in the U.S., based on the most recent U.S. Census data, is 65 for men and 63 for women.
It usually only takes a few years of work before you start fantasizing about finishing early. But until recently, that’s all it’s been: a fantasy.
FIRE is an acronym that stands for "financial independence, retire early." The idea is that if you make the right lifestyle choices, you can save a significant amount of money and retire much younger than the traditional retirement age of 65.
FIRE's true believers say it's possible to retire at 45. Or 35. Or even younger.
While many people aim to set aside 10% of their income, Jacob Lund Fisker, a writer who’s received credit for stoking the FIRE movement, says he set aside 70% of what he earned. Saving 70% of their income has now become the ultimate savings goal for followers of the movement.
How do you do that? The FIRE faithful say it's simple: Make more money, invest it well and don't spend any more than you absolutely have to.
Automating your savings during your work years — so the money is whisked out of your pay before you ever see it — bypasses some of the necessary willpower. You’ll still probably have to make big sacrifices, though, like not dining out or buying new clothes.
"I hate it. I hate it. I hate it. I hate it," Suze Orman said when asked about FIRE by podcaster Paula Pant. "You will get burned if you play with FIRE."
Unsurprisingly, many financial advisers aren’t huge fans of the FIRE movement.
Generally, they’ll remind clients that you never know what life might throw at you. And leaving the workforce before or right in the middle of when you’d be earning the bulk of your wealth makes it hard to return later if you need to.
Nothing’s more stressful than running out of money early in retirement or watching a stock market crash sink your portfolio for years on end.
But that may not worry you. And there’s a chance the 9 to 5 life just doesn’t suit you.
After all, many people see their lifestyles improve dramatically after they leave the workforce. They end up forging better connections with loved ones and having more time to make healthy meals and be active.
Plus, the quest itself encourages a number of good habits, like saving and investing, budgeting and thinking about retirement well in advance.
While nobody needs a retirement financial adviser, hiring one may help you reach your financial goals quicker — and avoid serious miscalculations that leave you short on cash when you’re least able to earn more.
Think of saving for retirement like staying healthy.
Sure, you can base your diet on articles you read online, get fitness advice from your marathon-running neighbor and rely on good habits like drinking plenty of fluids and getting plenty of sleep.
But you would probably fare better if you regularly checked in with a nutritionist, personal trainer and medical doctor as well.
Your long-term health and long-term prosperity are causes well worth splurging on, if you have the means. Educating yourself will go a long way, but not everyone has the time nor the nerve to go it alone.
An adviser’s certifications indicate their specialties, level of training and scope of work. But with so many different credentials and job titles, it’s easy to get confused.
Look for a Certified Financial Planner (CFP), a Chartered Financial Consultant (ChFC) or a Personal Finance Specialist (PFS) who specializes in retirement planning. If you just want someone to manage your investments, ask for a Chartered Financial Analyst (CFA) certificate.
If you’re retired or nearly there, Retirement Income Certified Professionals (RICP) specialize in helping people make the most of the assets they have already generated.
There are many more specialized options out there — for example, a Certified Public Accountant (CPA) focuses on taxes — but any of the above will suit the needs of most people.
Don’t try reaching out to a Chartered Retirement Plans Specialist (CRPS); these professionals operate retirement plans on behalf of businesses.
Once you know which credentials you’re looking for, make a list of potential candidates.
From there, put your investigation cap on and research each candidate’s track record. Start by digging up unbiased client reviews from around the web. Take testimonials on an adviser’s website with a grain of salt.
You can also check for formal complaints against an adviser with regulatory bodies like the Security and Exchange Commission (SEC), the Financial Industry Regulatory Authority (FINRA) and CFP Board.
After narrowing your options, it’s time to meet them. Remember that you’re going to be discussing sensitive financial details with your adviser for years to come, so it’s important that you trust them and feel comfortable talking openly and honestly with them about personal matters.
When meeting your top picks, you can weed out a lot of unscrupulous financial advisers with one simple question: Are you a fiduciary?
If yes, they are legally bound to act in your best interests. If no, they aren’t.
That’s not to say all non-fiduciary advisers are scammers. But if they want to recommend an investment that gives them a big kickback — even if it’s not in your best interest — there’s nothing stopping them.
They’re only required by law to recommend “suitable” products, which may not necessarily be the best ones for you.
Financial advisers have various payment structures. You should insist on getting the details before starting a relationship with one.
Commission-based advisers get kickbacks based on the investments you buy, leading to potential conflicts of interest.
Fee-only advisers charge flat fees, either by the hour or based on a percentage of your assets that they manage — around 1% per year, for example. They do not receive any commissions.
Fee-based advisers earn from both fees and kickbacks.
Fee-only advisers are the most unbiased professionals, since their paycheck doesn’t depend on where you invest your money.
None of these options are inherently good or bad — many commission-based advisers are perfectly ethical — but it should factor into your decision.
Depending on your perspective and your budget, you may come to the conclusion that a financial adviser will cost you more money than they’ll add to your portfolio.
Fortunately, human advisers aren’t the only option. You can cut costs by using a robo adviser.
Robo advisers are automated investment tools that help you build and balance a portfolio based on your goals for retirement and your appetite for risk. They usually have low fees and no minimum balance requirements.
The lack of human involvement means they won’t be as effective at handling complex situations or adapting to your specific needs, but some robo advisers offer access to human advisers for an additional fee.
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