With employer pension plans practically a thing of the past, and Social Security benefits not designed to provide 100% of a senior’s income needs in retirement, most of us will need other sources of income to help fund our living expenses in retirement. Since growing a retirement “nest egg” should be a lifelong goal, and it’s a good practice to periodically check to see if your savings target is on track or in trouble. Try asking yourself the following:
1.Do you know how much to save for retirement?
If you don’t know this, how can you possibly know if you’re on track to meet your goal? Make this calculation sooner than later. While Certified Financial Planner practitioner can help you thoroughly develop this answer, here are a few quick ways to estimate:
Estimate your final salary before retirement, multiply it by 10 and save that. It’s overly simplistic and doesn’t take actual retirement spending into account, but it’s a good conversation-starter.
Calculate the retirement income you'll need and back into your savings goal. If you’re closer to retirement, develop a retirement expense budget instead. If you’re younger, estimate your retirement income needs at 80-90% of your final salary before retirement. From this estimate, deduct other potential sources of income (e.g. Social Security, pension, rental income, etc.) to get a “net” that you will need your retirement portfolio to produce.
Most financial planners support a 3-4% withdrawal rate in retirement (e.g. divide your “net” annual income need by 4% - or multiply by 25). So If your net income need is $50,000 annually, your retirement savings goal becomes $1,250,000.
Use an online retirement income calculator. There are at least half a dozen online resources to help estimate how large your nest egg should be to produce retirement income goal.
With that “target” retirement savings goal, related online calculators can help you figure how much to save each year to hit your goal. Obviously, the sooner you start, the less you need to save each year to reach that goal.
2. How is your retirement “nest egg” invested?
This has two components to it: a) which account types to save into, and b) which types (and proportions) of investments placed in these accounts.
A tax-advantaged investment account (an employer’s 401(k) plan or an Individual Retirement Account (IRA)) help investments to grow tax-deferred, effectively giving a tax “deduction” for saving this way. If a 401(k) match is offered, take advantage of it: It’s a “bonus” you won’t pay taxes on right away.
Have the right mix of investment types in your retirement portfolio: Invest too conservatively, and the portfolio may not grow enough. Invest too aggressively, and you could lose money. Either way, you’ll be working longer!
The right mix of investments depends on your risk tolerance and your time horizon for investing. With this, portfolio construction can begin. Because there are so many more investment choices available today, consider hiring a professional to help you. To find help, go to: http://www.plannersearch.org.
3. How much are your fees?
Fees reduce your returns, especially over a long period of time. Pay attention to your investment expenses, such as 401(k) administrative fees or internal costs on mutual funds. It’s difficult to pay no fees (especially if you are looking for good financial planning advice as well), but keeping fees to a minimum helps your portfolio grow that much faster.
Answering these three key questions is a great way to start a good retirement plan. Be sure to re-visit your plan regularly, so you can make adjustments along the way, which includes getting professional help (if you need it) - before it’s too late.