5 Strategies for Retirement Savings Success
You may be saving for retirement, but do you have a strategy for how you save? A strategy for how you save today can make a big difference in how much money you will have available in retirement. A solid retirement saving plan takes the guesswork out of creating retirement income and creates a roadmap to help ensure your money will last as long as you do.
It’s also likely to make you happier in retirement. A recent study found that 91 percent of highly disciplined planners report being happy during retirement.
To start, try these five proven strategies for success:
1. Create a Vision. Popular formulas abound for calculating how much money someone should have saved by retirement age, but they’re often inaccurate or misleading. How much you’ll need for retirement is unique to you, based on your desired retirement lifestyle, your family history of longevity and your anticipated tax bracket during retirement.
A financial professional can help determine how today’s savings will help you make your vision a reality. That process includes setting priorities for how you spend and save today, as well as prioritizing your goals for your retirement.
2. Save Early and Regularly.
- Start early. The earlier you start saving, the less you have to save each month to reach the same goal. When you look at the numbers, you quickly see the power of compound interest. According to Morningstar, a 35-year-old who begins saving $820 a month with a 7 percent return will have $1 million by age 65. Someone who waits until age 45 to start saving would have to save $1,920 per month to reach the same goal.
- Make saving a habit. Saving a portion of each paycheck is the single most reliable way of getting and staying on track to reach your retirement goals. The easiest way is to pay yourself first, using automatic withdrawals from your paycheck before the money even reaches your checking account.
- Save as much as you can. Many industry experts recommend putting aside 20 percent of your income to pay off debt and save for retirement. How you divide that savings may depend on your age and circumstances. In your 20s, paying off college loans and a car loan may mean that a smaller percentage goes toward retirement savings. By your 40s or 50s, when your earning potential is strong, the amount going toward retirement savings should be closer to the full 20 percent.
No matter what your circumstances are, always save something toward retirement. If you’ve had a financial setback and are faced with debt, pay off your debt and save at the same time. Each time you get a raise, use that opportunity to increase the percentage of your savings.
3. Diversify Your Retirement Income Sources. Where you put your money as you’re saving for retirement can have an impact on how much retirement income you will have available. That’s because different savings vehicles get different tax treatment. For instance, a 401(k) allows you to put money in tax free today. But you’ll pay taxes when you take the money out in retirement. Contributions to a Roth account today are made after you pay your yearly taxes. When you take the money out in retirement, you won’t owe tax.
The permanent life insurance you use to protect your loved ones can be another possible source of income in retirement. Permanent life insurance accumulates cash value that grows tax deferred. If you no longer need the full death benefit after you retire, you can access that cash value to help supplement your retirement income.1
A comprehensive financial plan should demonstrate how much you can expect in retirement income based on various sources, both fixed (Social Security, pensions or income annuities) and variable sources, such as:
- Deferred annuities
- Traditional IRAs
- Roth IRAs
- Roth 401(k)
- Permanent life insurance
- Investments outside of a retirement account
To maximize your income during retirement, diversify your investments and savings vehicles today, keeping your risk tolerance, investment time frame and withdrawal plan in mind.
4. Protect Your Assets Against Risk. In addition to developing a diversified portfolio to avoid investment risk, you need to protect against risks that could impact your retirement savings goals and your family’s lifestyle for years to come. Those risks include:
- Disability. According to the Society of Actuaries, during your working years you run a greater risk of being disabled than of dying. Without disability insurance, an illness or disability during your prime earning years could greatly impact your retirement saving plan.
- Untimely Death. If you were to die unexpectedly during your working years, your family would not only suffer the loss of your paycheck for day-to-day needs, but also the nest egg you would continue to build for retirement. Life insurance can provide for both your family’s current lifestyle as well as your survivor’s plans for retirement.
- Long-term care needs. Without proper planning and protection, an unexpected or long-term illness could prematurely deplete your savings. Evaluate all of the options available to you to potentially cover a longer-term illness.
5. Avoid Common Saving Hazards. Even the most careful saver can fall victim to common pitfalls in investing for retirement, including:
- Over-diversification. You want to diversify among different asset classes and underlying investments to manage risk, but if you are duplicating the same investments with numerous vendors, you're probably overpaying fees—and that can impact your bottom line.
- Too much tax deferral. If all of your retirement accounts are tax deferred, you’ll be paying taxes on all of your distributions during retirement. To help you minimize taxes during retirement, have a balance of both tax-deferred and tax-free investments in your portfolio.
- Relying on Social Security. According to the Social Security Administration, Social Security benefits replace, on average, about 40 percent of your income in retirement. The balance needs to be covered by your qualified retirement plans and personal savings.
- Anticipating lower costs in retirement. Depending on the retirement lifestyle you desire, your retirement expenses can easily equal your current budget. Also, bear in mind that health care and help with activities of daily living may be substantially higher during retirement.
- Planning to work during retirement. Nearly half of retirees want to work during retirement, but less than a quarter of retirees actually do, for a variety of reasons. It’s wise to avoid counting on that income.