Saving for retirement should be a priority for everyone. Unfortunately, some people don’t start the process until later in life. If that’s your story, you can still be successful. The key is ensuring your plan allows you to reach your goal. To accomplish this, you’ll need a retirement calculator to do the math and the willingness to consider the following carefully:
1. Is your retirement savings goal realistic?
There are several variables to consider when calculating a retirement savings goal. The first is determining what your financial needs will be when you retire. That includes living expenses like rent or mortgage, utilities, transportation, and food. You’ll also want to add recreation and travel expenses you’ll incur while living and enjoying life in your golden years.
The second variable is time. As medical technology improves, people live longer and more active lives after retirement. Your retirement savings must be enough to cover you through those extra years. If you calculated that goal several years ago, consider reviewing it again. Your life expectancy could be longer now than it was back then.
2. Will your savings plan allow you to reach your goal?
Knowing how much you’ll need to save for a comfortable retirement is a good first step. The next step is creating a savings plan to ensure you reach that goal. Begin by reviewing your budget. Are retirement contributions prioritized? It’s a mistake to treat them as a secondary concern. A better strategy is to cut back on other expenses and increase contributions.
Small sacrifices today pay off when you retire. A great example of this is giving up expensive premium cable channels and redirecting those funds into your retirement savings account. You’ll be pleasantly surprised at how an extra $50 a month can add up as the years go by. Investment returns, like interest, are compounded. Build your principle whenever possible.
3. Have you checked your allocation and account mix?
The amount of your retirement contributions isn’t the only factor in reaching your retirement goal. 401(k) plans and IRAs are investment funds dependent upon stock market performance. They don’t do well when the market is down. That’s something you should regularly review with a financial advisor. Changes to the portfolio allocation might be necessary.
Your account mix comes into play here, too. The 2024 IRS annual contribution limit for 401(k)s, 403(b)s, most 457 plans, and the government’s Thrift Savings Plan is $23,000. If you max that out, you can save another $7,000 in a traditional IRA or Roth IRA, giving you a cap of $30,000 total per year. Are you hitting that? Can you rework your budget so you can?
4. When will you add social security to the mix?
Your retirement goal can be expressed as a cumulative number or a projected monthly income. The income calculation should include any social security payments you’ll receive. If you don’t mind getting a smaller monthly check, you can start taking those when you’re 62 or wait until you’re 70 to get the maximum available.
Choosing when to start taking social security can seriously impact your retirement lifestyle. According to SSA.gov, retiring at age 62 in 2024 would give you a maximum Social Security monthly benefit payment of $2,710. Waiting until you’re age 67 increases that benefit to $3,822. If you hold on until you’re 70, you’re looking at $4,873. Which of these works best for you?
5. What is your withdrawal strategy?
A key rule of investing is to leave the principle alone as long as possible. The IRS requires minimum distributions (RMDs) from your retirement accounts when you reach 72. That’s also the age at which you can take the maximum social security payout. Do that and keep your distributions as low as possible to stretch your savings further.
Your retirement savings distributions from a 401(k) or a traditional IRA will be taxed. Roth IRA funds were taxed before you deposited them, so withdrawing them is tax-free. Work with a financial professional to set up a withdrawal strategy to maintain your target retirement income with minimal tax liability. There are several different ways to do that.
The Bottom Line
Retirement savings are most effective if they outlive the retiree. Set a realistic savings goal, create a savings plan to help you reach that goal, and sit down with a financial advisor to discuss your investment allocations and account mix. Regarding withdrawals, balance social security benefits with taxable and tax-free retirement fund distributions. A financial professional can help you with that.
Sources
https://www.fidelity.com/viewpoints/retirement/how-long-will-savings-last
https://faq.ssa.gov/en-us/Topic/article/KA-01897
https://www.fidelity.com/learning-center/smart-money/ira-contribution-limits
https://www.irs.gov/newsroom/401k-limit-increases-to-23000-for-2024-ira-limit-rises-to-7000
