A study from the Center for Retirement Research at Boston College reveals that 50% of households are 'at-risk' and do not have enough money to support themselves after retirement.
This percentage has increased from 50% to 55% after the coronavirus pandemic.
Retirement is something that no one can restrict. It is something every person on the planet will encounter in their life. Some think of it as the best days of their lives, but unfortunately, it is really disappointing for some.
Whatever the case may be, planning to make it a delightful retirement is your duty in order to avoid financial burden and to live longer.
So, save for retirement!!!
Retirement refers to the time when one chooses to leave his work or occupation permanently. The United States and most other developed countries have their pension system or benefits in place to supplement retirees’ income. The Social Security system and the different retirement savings accounts help every worker make their retired life happy.
Having a retirement plan to hold adequate savings is a must for every worker in 2020.
That’s correct. Isn’t it?
So, in this scenario:
How much money do you need to retire comfortably?
While this question ultimately depends on you, I can give you some rough calculations or insights on how much retirement savings you should have to retire without having any worries.
If you want to live a happy retired life, you have to keep a percentage of your income aside every year. Most financial advisors or studies say, as a rule of thumb, you should save at least 15% of your pre-tax income for your retirement savings every year.
Saving 15% of your income every year can be a daunting task if you just started working. So start with 10% and increase it by 1% every year till you reach 15%.
However, the 15% rule only makes your retired life smooth if you get started at age 25. You may need to increase your percentage of savings if you start at age 35 or later.
Also, the older 15% rule needs to be modernized for the current trend. In 2020, you may need more than 15% to save for your retirement and it’s best to prepare for all circumstances.
Your retirement income should be 80% of your pre-retirement income, which is also the best method to plan for your retirement.
According to a 2020 study from Schwab Retirement Plan Services, the average 401(k) participant thinks they need to save $1.9 million for retirement, an increase of 12% from the $1.7 million reported in last year’s survey.
Most of the time, it depends on the individuals who retire and the inflation rate.
Whatever the studies or experts say, other factors also play important roles, and they are how much you will spend on medical care (if any), how long you will live, how much you will withdraw each year, etc.
For example, if you need to save $1.9 million (that’s around $2 million) for your retirement, you need to have $47,500 every year going into your retirement account if you get started at age 25 and retire at age 65.
The number of years an average person works is 65-25 = 40 years.
Some may work until the age of 70 or older.
Savings per year * Number of years = $47,500 * 40 = $1.9 million
If your annual income is $316,666, then 15% of it comes to $47,500 to save each year.
Also, this is just a rough calculation. In real-time, the amount you need to save every year varies depending on the interest you earn on your investment (you may have any), the inflation rate, etc.
The investment returns that get added to your saving at an interest rate (Compound interest is the best; average rate: 5%, good bet: 6 to 7%) determines how much you can save for a year.
If you get started at age 35 or later, you have to increase your side income and reduce your spending.
Calculate your retirement savings here.
When it comes to the money you can comfortably live on each year, it is determined by your retirement income withdrawal rate, which shouldn’t exceed 4% of your total retirement income in the first year of retirement as per what the four percent rule says.
From the 2nd year onwards, you can increase or decrease your withdrawal rate by the inflation rate.
Withdrawal amount in 1st year = Retirement Income * 4/100 = $1.9 million * 4/100 = $76,000
Thus, you should withdraw $76,000 in the very first year. If the inflation rate goes up by 2% in the 2nd year, you can spend $77,520 that year. Alternatively, if the inflation rate goes down by 2%, you can spend $74,480 that year.
As per the rule, the amount of money you can live on comfortably is mainly influenced by inflation.
So if you need $1.9 million for your retirement, you can comfortably live on $76,000 starting from the first year.
Most Financial Advisors’ Suggestions
Though the general rule states 4%, it’s 100% not recommended to stick to it strictly. This rule also needs to be modernized according to the current trend, as these rules come from the ’90s.
You can start with what the rule mentions and adapt to what you can do better for your retirement, which depends on the many factors I mentioned earlier apart from the primary factors.
$76,000 per year may not be sufficient for some or can be more than enough for some. It also depends on where you live, medical expenses you have (if any), and travel expenses.
I calculated from $1.9 million (approximately $2 million) of retirement income to the yearly income you need in your retirement. You can go upwards from your needed annual income in retirement to the overall retirement income you need.
Can you really retire with $2 million?
It can be overwhelming when you heard $2 million, but you can definitely retire with that if you start investing brilliantly with all the ways you can step forward. You can see exponential growth over your investment over the years by knowing how to make a smart move.
Let’s check out the major retirement accounts before seeing the steps to save for your retirement goal of $2 million.
Major Retirement Accounts
This account is offered through employers, so you need to check at your workplace to know more about a 401(k). In 2020, the contribution limit for employees who participated in a 401(k) increased from $19,000 to $19,500.
The amount you contribute to your 401(k) is deductible from your taxable income. If you are aged 50 or older, you can put up to $26,000 in the account, known as required minimum distributions.
You can withdraw your taxed funds from the account starting at age 70 ½, and you may also face penalties if you take money out of the account before age 59 ½.
A traditional IRA is a type of individual retirement account that allows you to contribute a percent of your pre-tax income to grow tax-deferred until your retirement withdrawals occur. You should pay taxes when you withdraw your retirement fund.
Suppose you want to take out your contribution (retirement savings amount) before 59 ½; you have to pay a 10% early withdrawal penalty. In 2020, you can contribute up to $6,000 per year if you’re under age 50 and up to $7,000 per year if you’re aged 50 or above.
A Roth IRA is also another type of individual retirement account that you can use when your annual salary is $139,000 or less (or $206,000 if you’re married and file a joint tax return).
It helps you save all your taxed income to your retirement account, so you don’t have to pay any taxes on the investment gains and the withdrawal amount once you retire.
But you have to pay a penalty of 10% of the withdrawal amount if you want to withdraw your earnings before age 59 ½ in a Roth IRA.
Retirement Planning: 5 simple & easy steps to save for retirement
You don’t need to cringe thinking about retirement after seeing the amount you need to save for your retired life.
There are 5 simple & easy steps you can take to save for your retirement.
1. Set a Realistic Retirement Savings Goal
I searched what the studies and experts say about retirement planning. Considering all of these factors, take the first step by setting a realistic savings goal for yourself and improve it over time.
Try to save at least 10% to 15% of your yearly income for your retirement savings and increase it every year as much as you can until you reach 15% or 20% of savings or even more.
2. Invest in Your Retirement Savings Accounts
If you work at a for-profit employer, then ask your employer to start a 401(k) account for you if not yet started. This is how almost everybody invests their money for their retirement.
If you work at a non-profit employer/state or local government, you have to start contributing to a 457 or 403(b) or both. These plans look similar to a 401(k), so you can max out these accounts for your retirement.
Additionally, the 457(b) account is beneficial for older people because it offers some special catch-up savings provisions. Also, it allows you to withdraw your retirement income before age 59 ½ without paying any penalty.
If you’re self-employed, you should know about SEP and Solo 401(k).
If you manage a business and have employees, you can save all your funds in the SEP account, with a maximum of up to 25% of compensation or $57,000. You can also set up a Simple IRA, but it has some limitations.
If you work as an employee and an employer, you can set up your Solo 401(k) account, also known as Uni-K and One-participant-K. You can also set up a SEP if you don’t want to contribute more than 20% of your earnings. If you also want to set up your plan as a Roth, options exist for making an account in a Solo 401(k).
What happens if you change your job?
If you change your job, you can rollover your old retirement account into a new one.
Rolling from a 401(k) to IRA or new 401(k) is possible when you’re eligible to do so under your new employer. You can rollover your 457 and 403(b) accounts too.
3. Improve Your Retirement Investments To Save $2 Million
There are specific ways to improve your investments during the time you’re saving for retirement, and they are:
Max out your 401(k)
While maxing out your 401(k) savings (contributing $19,500 for the year) may not make sense for some in 2020 since a lot of options are available out there, it’s still recommended by most financial advisors that you should max out your 401(k) first and go to others next.
Holding only a 401(k) account is not enough for all, so save more for your retirement using an IRA.
Start investing your retirement income in stocks, bonds, mutual funds, etc. when you open your retirement accounts.
By doing so, your retirement income will increase year by year.
Generally, stocks can yield higher returns than the other two. So be smart while investing your retirement income.
Bloom is the best Robo-advisor that manages your 401(k), 457, 403(b), traditional, and Roth IRA. It has better features such as no minimum account balance, free account (stocks & bonds) analysis, investment expenses audit, and financial advisors’ support.
You can make use of these features by joining Bloom here.
Private pension plans
Unlike a 401(k), you or your employer can’t make investment decisions on pension plans; instead, a sponsor or a company (who promises to provide you with the monthly pension amount) can decide.
Be careful while selecting a pension provider because some can perform well, and some can perform badly or declare bankruptcy. Check out the Pension Benefit Guaranty Corporation (PBGC) before saving in pension plans.
Invest in real estate
You can invest your money in real estate and maximize your investments. Knowing Section 1031 is also significant when you start working in real estate.
You can flip land, sell a house, rent an apartment, or do many other things in real estate investment.
Choose index funds & others
Higher returns can generally be attained by investing in index funds with low maintenance costs. The S&P 500 Index funds track the wide range of best companies all around the world.
Stocks are generally riskier than bonds, but the higher risk provides more notable returns. So choose the right tool to take your ride by checking the following factors.
- Growth & risks (Stocks – Long term growth with higher returns/risks; Bonds – Stable growth with moderate returns/risks)
- Business sector – Technology, finance, health care, etc.
- Market opportunities – Grooming sectors, developed market, etc.
- Expense ratio – This indicates what you pay the brokerage for managing your investment; look for funds with less than or equal to a 0.5 expense ratio
- Tax cost ratio – Holding an index fund costs you taxes also, and it generally comes to 0.3%
The other investment options you can choose in the S&P 500 and other companies are:
- Dividend stocks
- Mutual funds
- High-yield savings accounts
CIT Bank is the best pick from our end for a high-yield savings account, not to be confused with Citibank. They are two different companies. CIT stands out as the best in the crowd by offering the following benefits that others don’t:
- Minimum initial deposit fee – $100
- APY – 0.6 % (Money Market Account) & 0.55% (Saving Builder Account)
- Penalty-free CD after 7 days
- High security
- No joining fee and no minimum balance fee
Opening a high-yield savings account apart from having IRA accounts is very much beneficial when you want to save more money without a 401(k).
Take advantage of your HSA
A health savings account (HSA) is the best option for all who want to save more for their medical expenses because the money you take out for your eligible health expenditures is entirely tax-free.
Your HSA account earns tax-free interest, and you don’t need to pay the penalty if you want to take out your money for eligible reasons. And unused HSA funds can also roll over to the next year.
eHealthInsurance is the leading online health insurance company for families and individuals. They have over 180 health care programs that offer their customers 10,000+ health insurance products.
You can take full advantage of Social Security if you’re 70. Starting Social Security benefits even at the age of 62 can dramatically reduce your monthly benefits.
In 2020, the average Social Security benefit for a person who retires at age 66 is $1,503 per month or $18,036 per year.
4. Cultivate Good Money Habits
There are various ways to develop good money habits to save more for your retirement.
Always stick to a budget plan
You should stick to a budget plan if you want to be always on track with your retirement savings. Learn how to budget and maximize your savings.
The two best budgeting apps I recommend are:
- Mint (Free & Basic features)
Don’t spend your raises
When you get a raise in your company, don’t spend it on the luxury things you dreamt of buying; instead, you can invest it in an IRA or index funds.
Try to save $1000 a month
Take a 30-day money saving challenge and try to save $1000 a month. However much you put aside from your monthly income will exceedingly help you with your retirement savings.
Two of my most favorite saving apps are:
Stop overspending on non-essentials
You can stop buying the things you don’t need in your life. It helps you to live below your means and save more for your retirement.
Trim helps you negotiate your bills for a lower rate and cut down your unused subscriptions for free by analyzing all your transactions once you link your bank accounts with it.
Get rid of any debts
Debts can easily pull money from your pocket. Trying to pay them off one at a time is the best decision you can make if you have two or more.
Earn extra money
If you have some spare time that you use to check your social media, listen to music, watch movies, or go out to a restaurant, then you can absolutely make use of that time and earn extra money on the side.
Start a business
Whether you want to sell property, crafts, or any products, you need an online presence. Starting a blog/website can help you to sell any products you or others create.
You can dramatically change your lifestyle with a blog in a short period of time if you have the right strategies. You can leave your full-time job, work from home, and earn more and more by doing an online business.
Be a healthy person
If you’re not a healthy person, you will have to spend most of your retirement income on medical-related expenses. It spoils your current financial health and reduces the monthly retirement income you get.
So, try to be a healthy person forever. It will indirectly help your retirement.
5. Improve Your Personal Finance Routinely To Reach $2 Million Mark
Your personal finance can be routinely improved by considering three factors.
Save 1 percentage point more from your paycheck
Every year, consider saving 1% more from your paycheck. This way, you can increase your savings over the years until your retirement.
Reconsider your investments
Explore more investment options and choose depending on the market trends. Investment decisions need to be reconsidered every 5 years or at least 2 years depending on the market.
Suppose you need a free tool to improve your retirement investments. In that case, Personal Capital is the best option to choose from since it helps you provide a retirement planner, portfolio management, retirement fee analyzer, etc.
Personal Capital also helps you to determine your overall net worth by calculating your net worth.
Joining Personal Capital can help understand your retirement strategies completely and improve it over the period.
Take a debt consolidation loan
Track all your debts every year, and if they interfere a lot with your savings for retirement, then try to take a debt consolidation loan that will bring down all the debts to a single interest rate.
This way you can quickly pay off your debt with a lower interest.
Lendingtree helps you consolidate and close down all your debts asap. You can shop online, compare, and find loans with lower rates and fees because the competition is massive among bankers and brokers.
These are all the ways you can save money for your retirement, and if you need more tips or any personal finance advice, please ask me in the comments section below; I will answer every question.
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