What is the Best Way to Start a Retirement Plan?
A retirement plan is more than just a savings account. It’s a roadmap designed to meet an individual’s financial needs when they’re no longer earning a paycheck. For many people, retirement can span decades. Ensuring you are financially secure during this time requires planning and dedication.
What is a Good Financial Goal for Retirement?
You should start saving for retirement as early as you can. This means contributing to a retirement account when you start having earned income. The younger you are when you create a retirement account, the more prepared you’ll be for retirement. It’s recommended by most experts you should have 8x your annual earnings saved by age 60, and 10x your annual earnings by age 67.
Retirement Questions to Ask Yourself
The first question to ask yourself is, at what age are you planning to retire? Knowing that, you can get an idea of how many years of retirement you’ll need to finance, which informs you how much you need to save.
There are some important retirement age milestones to consider as well:
- Age 62: The earliest age you can start taking social security, but with reduced benefits.
- Age 65: The age you’re eligible for Medicare.
- Age 67: If you haven’t already taken social security, this is the age you can receive the full benefits.
- Age 70: If you delay taking social security to now, your benefits can increase.
Also, think about what kind of lifestyle you want to have in retirement. Do you plan on traveling or settling down with some beach-front property? What are some expenses you’ll likely have along with any debts that you might owe? Depending on how healthy you are, healthcare expenses can add to what you need to save.
Finally, consider what income streams or retirement accounts you already have to help you reach your goal.
What are the Different Types of Retirement Accounts?
There are different ways to save for retirement, and you can take advantage of as many as you’re eligible for.
- Individual Retirement Accounts (IRAs):
- Roth IRA: Grows tax-free and withdrawals in retirement are tax-free as well.
- Traditional IRA: Allows for tax-deductible contributions.
- SEP IRA: A Simplified Employee Pension is designed for those who are self-employed and small business owners.
- SIMPLE IRA: Savings Incentive Match Plan for Employees, like an employer-sponsored 401(k).
- 401(k): Employer-sponsored plans often include contribution matching.
- Contribute as much as you can to these accounts.
- 403(b) and 457(b): Tax-advantage retirement plans for employees of non-profit organizations and government agencies.
Ways to Prepare for Retirement
Speaking to a financial planner is always beneficial to coming up with a plan for a comfortable retirement. But if you want to get a good idea of how much money you’ll need in retirement on your own, here are a few methods.
The $1,000 Per Month Rule
This method is also referred to as the 5% rule. It’s a way to determine a safe withdrawal amount to sustain your retirement. The $1,000 per month rule for retirement states that for every $240,000 saved for retirement, you can withdraw $1,000 per month, which is a 5% annual withdraw rate.
To start, calculate the monthly expenses for housing, food, transportation, health care, insurance, and other factors (do your best to consider inflation) and add them all up. Now, take that total and multiply it by 12 to get the annual expense amount. To figure out what a 5% withdraw rate is for that amount of money, take the annual expense amount and multiply it by 0.05. For every $1,000 needed to maintain or exceed that 5% withdraw amount, you should have $240,000 saved.
For example, if your annual expense amount is $40,000, then a 5% annual withdraw equals $2,000. To reach that goal, $480,000 needs to be saved.
Retirement Contributions by Age
If you want to keep things simple, here’s a breakdown of how much you should have saved by age based on your annual salary:
- 20s: Save 10-15% of your gross income.
- 30s: Have 1x your annual salary saved for retirement.
- 40s: Have 3x your annual salary saved for retirement.
- 50s: Have 6x your annual salary saved for retirement.
- 60s: Have 8x your annual salary saved for retirement.
- 67: Have 10x your annual salary saved for retirement.
- For example: if you are earning $80,000 a year, you should have saved $800,000.
What are the Risks of Retirement Planning?
It’s not just debt or healthcare costs you need to think about. Here are other external forces that can drive up living expenses in retirement.
- Inflation: The value of the dollar will change over time, usually decreasing by a certain percentage per year. This can diminish your purchasing power.
- Longevity: One of the biggest risks a retiree faces is outliving your finances. How many years you spend in retirement is not guaranteed. Some experts say to plan for at least 30 years in retirement.
- Market fluctuations: If the stock market plummets, retirees don’t have the time for the markets to recover.
Open An IRA With Community First Credit Union
We offer Community First Credit Union members a variety of IRA options that include unique benefits. Contact us today to open an account or to talk to one of our team members about planning for retirement
*Non-deposit investment products and services are offered through CUSO Financial Services, LP ("CFS") a registered broker-dealer (Member FINRA/SIPC) and SEC Registered Investment Advisor. Products offered through CFS: are not NCUA/NCUSIF or otherwise federally insured, are not guarantees or obligations of the credit union, and may involve investment risk including possible loss of principal. Investment Representatives are registered through CFS. The Credit Union has contracted with CFS for investment services. Atria Wealth Solutions, Inc. ("Atria") is a modern wealth management solutions holding company. Atria is not a registered broker-dealer and/or Registered Investment Advisor and does not provide investment advice. Investment advice is only provided through Atria's subsidiaries. CUSO Financial Services, LP is a subsidiary of Atria.
