With tax season upon us again, finances are top of mind. And along with that, making sure everything is on track with retirement planning. Have you taken full advantage of your company’s 401k program? Have you overextended yourself on your mortgage? Does it seem like retirement is so far off, it’s difficult to continue (or even start) to make it a priority? It’s never too late to start saving or to get on track with a financial planner who is aligned with your goals for the future. Even though that day may seem far in the future, it’s important to take the steps towards building up enough resources for retirement and map out clear goals for how you want to get there.
The key question surrounding retirement always seems to be: how much will I actually need? One way to calculate this is to think of yourself needing about 70% of your pre-retirement salary to live a comfortable life. This may be enough if you have no expenses. If you’ve paid off your mortgage, student loans and are in the picture of health, this is not a bad way to calculate what income you may need. But if you plan to travel the world, finally build that dream home and buy a boat, you may need 100% of your annual income or more.
It’s important to think realistically about what kind of expenses you may have in retirement. Be honest. These estimates are imperative when trying to figure out how much you need to save in order to live comfortably. Take a closer look at your current expenses and try to consider how they might change. As an example, your mortgage may be paid off by retirement, but health care costs may likely increase.
Ideally, the best time to start retirement planning is as early as possible. The easiest way to get on track is to begin saving as soon as you enter the workforce and start earning paychecks. Simply put, the sooner you begin to save, the more time money has to grow. If you start saving in your 20’s and plan to retire at the target age of 65, investments will increase exponentially and have as much time as possible to grow. If you start saving in your 30’s, there are fewer years for that money to grow.
Compound interest can be confusing, so here’s an example to illustrate the point. Jennifer begins saving for retirement at age 20. For 10 years, she contributes $1000 to her savings account, then stops and doesn’t touch the money until she is 65. Mary begins saving for retirement at age 30. She contributes $1000 to her savings account from age 30 to 65. Mary contributed a lot more of her money to the account, but Jennifer’s account is actually worth more due to compound interest. Even though Jennifer put in less up front, she has more to retire on than Mary who started saving later in her career.
One of the most important things you can do when it comes to retirement planning is to start contributing to your employer’s 401k program. Take ownership of your financial future. If you’re worried about not saving enough, take smaller steps to divert as much of your earnings into savings as you can. Cut unnecessary expenses. If you don’t have a budget, create one. If you’re not sure where to start, consider reaching out to a financial planner to help pave the way. Saving for retirement can seem like an impossible task, but simply starting and sticking to your goals will go a long way towards creating the best future possible.