If you’re like most Americans, retirement planning is a daunting task. You may need to save more or worry about your savings progress.
But there are steps you can take to give yourself a better shot at retiring with the life you want.
Whether retirement is far away or fast approaching, making savings a non-negotiable part of your financial plan is essential. By starting early in your savings journey, you can reap the benefits of compounding over time.
Young adults have time on their side, which allows them to take more risks with their investments and benefit from more significant returns. They can also sock away more money annually than those who start saving in their late 30s or 40s.
People in their 40s and beyond face competing priorities like paying off debt, raising children, and caring for aging parents. However, many ways to boost your retirement savings remain, including making catch-up contributions to tax-advantaged accounts and reducing fixed expenses. In addition, setting up an emergency fund can protect your retirement account from the unexpected. Inflation is a significant factor to consider as well. It can raise the price of everything from housing to food and health care, so estimating future costs will help determine how much to save.
Make Savings a Habit
One of the best ways to build a savings habit is to make it part of your routine. This can be accomplished through a budget or by setting aside money automatically each month.
It may be challenging to stick with a budget, but making it a priority can help you find more opportunities to save. For example, many have unused 401(k) accounts in former employers’ records. Consider contacting a service to consolidate those old accounts into a single IRA you control.
It would help to consider how much your expenses will likely increase or decrease in retirement and whether you’ll work or continue earning some income. It’s recommended that you plan to replace 70 to 90 percent of your pre-retirement income through savings and Social Security benefits in retirement.
Invest in Tax-Advantaged Accounts
Taxes drag investment returns, so planning around them is essential to your Boeing retirement plans strategy. Depending on your situation, consider tax-advantaged investment accounts such as an IRA or employer-sponsored 401(k) that offer pretax contributions.
You could also use a SEP IRA if you’re self-employed or own a small business. These account types are similar to traditional IRAs but allow you to defer taxes until withdrawal in retirement.
Many experts recommend saving about 25 times the amount you anticipate spending annually in retirement. There are several caveats: Social Security benefits, pensions, and part-time work could reduce your savings needs; healthcare costs could increase; and market fluctuations and inflation can eat into your portfolio.
Generally, it’s wise to hold less tax-efficient investments in tax-advantaged accounts and more taxable ones to take advantage of more favorable tax treatment. However, every situation is unique, and a financial advisor can provide more specific guidance.
Delay Social Security Benefits
Many individuals nearing retirement want to experience all they couldn’t do when working, such as exotic travel vacations, marathon running, or novel writing. But they may also need to stretch their savings to fund a long retirement.
The good news is that delaying Social Security benefits can help. While it can be tempting to take benefits early, doing so can have significant financial consequences.
A key consideration is longevity risk – the likelihood of living longer than average – which can be mitigated by postponing Social Security benefits. In several ways (and assuming reasonable accurate interest rates), delaying Social Security benefits essentially represents an astonishingly valuable “investment” return, superior to TIPS and far more compelling than commercially available annuities.
Individuals and couples should consult a qualified financial professional to understand their Social Security options. Delaying benefits can reduce future required minimum distributions (RMDs) and their taxes. It can also allow other tax-deferred assets to grow longer, potentially eliminating the need for RMDs by age 70.