No matter what stage of life you're in, it is never too early to start planning for the future. To set yourself up financially, there are preparations to guide you through the retirement process. Here are a few things you should be doing now to prepare for life after working:
Figure Out Your Retirement Goals
The necessary first step of preparing for retirement is knowing how much money you will need to cover expenses for the rest of your life. The current average retirement age for men is 65 and for women is 62, both of which are on the rise. To maintain your standard of living during retirement, experts estimate that you'll need around 70% of your pre-retirement income after you exit the workforce. A common goal to achieve this is to have 10-12 times your annual income saved by the time you retire. For example, if you're making $80,000/year at the time of your retirement, ideally, you'll have $800,000 to $960,000 in your retirement savings. This can seem like a daunting goal, but by taking the necessary steps below over the course of your working years it can be achieved.
Get Out of Debt
Getting out of debt is beneficial to your financial health at all stages of life. However, you especially do not want to carry debt into retirement as it becomes even more difficult to try and pay it off while on a fixed income.
If you have debt, you should be planning on how to pay it off. If you have many different debt streams, you may want to consider the Avalanche Method. With this method, you'll make the minimum payment on all of your accounts. Then, you should put as much extra money as possible toward the account with the highest interest rate. Once the debt with the highest interest is paid off, start paying as much as you can on the account with the next highest interest rate and continue the process until all your debts are paid off. It may take longer to see progress, but since you're tackling your debts in order of interest rate, you'll pay less overall and get out of debt faster. Another option is debt consolidation. This combines all your debts so you only have one monthly payment.
Whatever debt you have, it's important you begin managing it now to set yourself up for debt-free life in retirement.
Save: Prioritize Investing in Employer's Retirement Plan…
If a retirement savings plan like a 401(k) is offered by your employer, it is imperative that you take advantage of it. A 401(k) is an employer-sponsored retirement savings plan that offers tax benefits while helping you save for the future. Plans give you a variety of different stock options where you can invest your funds. Many of these 401(k) programs feature employer contribution matching up to a certain percent. For example, if the plan your employer offers will match 401(k) contributions up to 3%, if you elect to have the max deduction of 3% automatically taken out and invested into your 401(k), your employer will also contribute 3% of your income. This means each paycheck, 6% of your income will be invested in the 401(k) even though you are only contributing 3% of your own money. It is essentially "free money" your employer offers, so if you're able to, you should consider contributing as much as your company matches.
Once your money is in a 401(k), you should let it grow there until you retire, as there are penalties to withdrawing money from it until you're over 59.5 years of age. Most experts agree that you should look to save 10%-15% of your income for retirement. This includes your employer's contributions, so set up your automatic contributions accordingly. There are caps on the amount you can contribute to your 401(k) — $22,500 a year, with an additional $7,500/year in catch-up contributions for those over the age of 50.
…or Start an IRA
If you are self-employed or your company does not offer an employer-sponsored retirement, you should consider an Individual Retirement Account (IRA). Much like a 401(k), an IRA offers a variety of investment options, and you don't pay income taxes on the earnings as long as the funds stay in the account. Yearly contribution caps for IRAs are much smaller than that of a 401(k) at $6,000/year; however, there is an additional $1,000 catch-up that can be contributed for those over the age of 50. Similar to 401(k)s, you should set up automatic payments and contribute as much as you can. The $6,000 limit breaks down to a max of $500 that you can contribute monthly. And there are also penalties for withdrawing funds from your IRA prior to reaching the age of 59.5.
Learn About Social Security
Another income stream that will help you in retirement is Social Security. On average, Social Security replaces 40% of pre-retirement income for retirement beneficiaries. Currently, you can start receiving Social Security retirement benefits at age 62; however, you receive greater benefits if you wait until turning 70 to collect. This chart from the Social Security Administration highlights the differences between starting benefits as soon as you can or waiting until the full retirement age of 70 based on your situation. The Social Security Administration website also has a number of tools that help you check your eligibility, along with getting an estimate of how much you can expect to receive and when.
Planning for your retirement is a long and sometimes stressful process. By getting a jump on things and taking the necessary steps as early as possible, you'll set yourself up for financial well-being for your golden years ahead.
Erin Ellis
Accredited Financial Counselor ®
Philadelphia Federal Credit Union
eellis@PFCU.COM