Planning for retirement? There are a lot of factors that need to be figured out before one says goodbye to the working field forever. But according to the United States Department of Labor, fewer than half of Americans have calculated how much they need to save for retirement. While the average time Americans spend in retirement is 20 years.
Planning ahead can mean the difference between a worry-free retirement and a stressful one. Financial security is worth investing in, so take the time now to plan out the details and start of one the right foot.
Planning for retirement doesn’t have to be hard. We’ve broken down the most common questions asked about retirement, and offer tips on how best to prepare.
How Soon Should Someone Start Saving For Retirement?
The truth is, the sooner someone starts saving for retirement, the better off they will be. The sooner a person begins saving, the more time money has to grow.
The trick to retirement is to save as much money as possible. No matter the age, its best to start as soon as possible. A good budgeting trick is to use the 50, 20, 30 rule. This simple to follow budgeting guideline allows people to easily determine how much money they need to allocate to different financial areas.
Ideally, an individual should spend 50% of their after-tax income on essential needs. This includes housing, utilities, groceries, car payments, etc. Savings should account for 20% of the income. And the final 30% can be used for entertainment or luxury sending.
Investing money into a tax-deferred retirement plan is always a wise decision because over the years, income is compounded. This means that if an account delivers the traditional 7% annual return, then the money in the account will double very decade. Leaving a retiree with significantly more money than what they’ve invested in the account over the years.
So ideally, it’s best to start saving as soon as possible to allow the money to grow. For more information on the different types of retirement plans check out this article by The Balance.
How Much Money Will A Retiree Need?
This is one of the most highly asked questions when it comes to retirement. There are plenty of articles that provide a specific retirement savings amount. But in truth, the amount a person will need for retirement will depend on a few different factors.
Determining how much a person’s lifestyle costs, will help in determining how much money will need to be saved in order to retire comfortably. Don’t expect to live in the lap of luxury when retired, unless those extra costs are going to be accounted for when saving.
The 4% rule can be used to determine if an individual has enough money to retire. This rule states that four percent of the savings account should be enough to last per year. The magic number that needs to be achieved can be determined by dividing the annual spending amount by 0.04 to reach the target amount.
Housing, monthly expenses, medical bills, vacations, and spending habits will all affect how much a person will need for the average 20 years spent in retirement. Another good way of calculating how much a person should be saving, is to use a retirement calculator. NerdWallet provides a free retirement calculator that determines how on track someone is with a retirement savings score.
There are also worksheets online that help with budgeting. By planning how income is allocated, a person can successfully save the right amount of money for retirement and keep entertainment expenses low.
Can A Person Retire With Debt?
Retiring with debt is unfortunately, a reality many are facing. No matter the type of debt, it’s best to try and dwindle it down as much as possible before retirement. Once retired, a person with debt will have to use their savings to make those monthly payments. And that additional bill will have to be accounted for when saving for retirement.
As overwhelming as debt may seem, there are ways to make it more manageable. To make a dent in the total amount due, start by paying more than the minimum. Saving money on interest means more money is available to add to the retirement savings fund.
As time consuming and predictable as it is, budgeting will significantly help in paying off debt. By seeing how much money is spent on things not considered essentials (like rent), a person can begin to invest more into paying off that liability.
But if the debt is significant, and it seems futile to try to pay the full amount, it may seem tempting to just pay the minimum until death come knocking. But the money owed will have to come from somewhere.
This means if the borrower owns a home, the estate will be sold in order to cover the remaining balance. Any assets will be seized and liquidated. So if a retiree wants to leave behind any inheritance, the debt must be cleared away. And if there are any co-signers for the debt, they will be forced to pay what a retiree left behind.
Review Health Insurance Coverage
Getting older means having more health problems, so make sure to verify what’s covered in the insurance plan. In case of a medical emergency, don’t be stuck with a hefty medical bill. While many seniors may qualify for Medicare after 65, this isn’t always the case. And if a person does qualify, Medicare doesn’t provide coverage for everything. Dental, vision, hearing, and long-term care are not covered by Medicare. So acquiring a supplemental plan is wise. Once retired, it’s a good idea to reassess what coverage is needed and go from there.
That Wasn’t So Hard!
Overall, there is a lot to consider when it comes to planning for retirement. From savings, to healthcare, it can be stressful just knowing how much an individual needs to figure out before hitting 65.
But thinking about retirement now, can save a person anxiety down the road. With timing and commitment, planning a stress-free retirement can be easily achievable.
So take the time to map out what needs to be done, calculate how much money will be spent while in retirement, and try to tackle any debt. No matter what age a person currently is, retirement is approaching. So take the time to protect your future.