Whether retirement is a few years or a few decades down the road, it's never too early to put some thought into what lies ahead. Here are four things you can do right now to take control of your retirement.
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1. Come up with a plan
Entering retirement without a plan is sort of like stumbling into a supermarket without a shopping list or your wallet. If you don't have a basic idea of how you'll spend your time, where you'll live, and what your expenses will look like, you'll have a harder time working toward a savings goal that will ultimately suit your needs. According to a 2016 TD Ameritrade study, 85% of workers with a financial plan for the future feel good about their chances of retiring, while just 28% of folks without a plan feel similarly. Furthermore, those who map out a plan tend to set higher savings targets. Planners aim for $1 million in total retirement savings on average, while those without a plan have an average savings goal of $893,000.
But even more importantly, those who have a plan for retirement save more than those who don't. TD Ameritrade found that planners saved an average of $460,000 in time for retirement, while non-planners saved just $239,000. While figuring out your retirement number is easier said than done, you can start by mapping out your goals and exploring different financial scenarios to help you get there. For example, if you're hoping to retire in your mid-60s and spend your first few years traveling extensively, you'll need to save enough to pay for that lifestyle, whereas retiring at 70 and spending time with family tells a different financial story entirely.
2. Save in a tax-advantaged account
Whether you choose to open an IRA or participate in an employer-sponsored 401(k), there's a major difference between saving money in a dedicated retirement account versus a traditional brokerage account. For one thing, whether you fund a traditional retirement account or a Roth, your money gets to grow on a tax-deferred basis, which means you won't pay taxes on investment gains you realize along the way. Furthermore, if you put money into a traditional IRA or 401(k), you'll save money on your taxes every time you make a contribution. Roth IRAs, by contrast, are funded with after-tax dollars, but they offer an equally important tax break -- withdrawals in retirement can be made completely tax-free. Saving in a tax-advantaged account can help you accumulate an even larger nest egg in time for retirement, so if you don't have one already, it pays to explore your options.
That tax-deferred growth we just talked about? The best way to take advantage of it is to save as much money as you can, as early as you can. Thanks to the beauty of compounding, you can turn relatively small contributions into a pretty impressive sum over time.
The following table shows how much you stand to accumulate if you start making modest contributions to a retirement account at various ages:
TABLE AND CALCULATIONS BY AUTHOR.
Notice the difference between first saving at age 25 versus age 30. Saving just an extra $12,000 during that five-year period will give you an ending balance that's $209,000 higher thanks to the power of compounding. You'll also note that these calculations assume an average annual 8% return. While a bond-heavy portfolio won't give you that sort of yield, an 8% return is more than attainable with a stock-focused investment strategy. And if you start early enough, you'll have plenty of time to ride out whatever market volatility comes your way.
4. Read up on Social Security
Though the future of Social Security is somewhat precarious at the moment, rest assured that the program is by no means going away. Even though its trust funds are set to run dry in 2034, once that happens, Social Security will still have enough incoming tax revenue to pay about 79% of scheduled benefits. Not only that, but based on current estimates, the program can continue paying benefits at that level until 2090.
That said, don't even think of counting on Social Security alone to cover your living costs in retirement. Social Security is only designed to replace about 40% of the average worker's pre-retirement income, and while many of us can get by on 70% to 80% of what we previously earned, some of us will inevitably need more. Saving independently for retirement is the only way to bridge that gap, so don't get too comfortable with those incoming benefits checks.
Of course, if you're smart about Social Security, you might manage to increase your benefits. Delaying benefits past your full retirement age, for example, will give you an 8% boost in payments for every year you hold off until age 70 under the current rules. Similarly, because Social Security is based on your highest 35 years of earnings, working longer at the end of your career, when your salary is at its highest, could raise your benefit amount. Even if you're years away from retirement, it pays to learn more about how Social Security works and develop your own strategies for maximizing this vital program.
The financial moves and decisions you make during your working years can impact your retirement in more ways than one. If you come up with a plan, save and invest wisely, and take a smart approach to Social Security, you'll be putting yourself in the strongest possible position to retire on time and with enough money to meet your goals.
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