Once upon a time, when you hit retirement age, you could retire. It doesn’t work like that anymore. No longer is the question: “am I old enough to retire?” Now, the question is: “how am I possibly going to afford life after work?”
Reports claim that 10,000 Baby Boomers are retiring every day. But many of them are retiring into a standard of life that is significantly less ideal than they imagined. You don’t want that for you.
Don’t worry. If you’re smart, retirement will be a breeze. It just boils down to asking the right questions.
One of the biggest fears people have about retirement is that they’ll retire broke. The problem with this way of thinking is that retirement isn’t an event. Rather, it’s a process that starts even before you reach your prime working years.
Unfortunately, more than half of Americans go into retirement broke, with nothing to show for the 35+ years they’ve been working. According to a GoBankingRates research, there is a significant chunk of the population that has less than $10,000 saved for retirement. Worse, many don’t have any savings at all.
A survey by Bank of America Merrill Lynch revealed that about 81% of Americans don’t even know how much they need to save for retirement.
Below are 3 questions to help you be more proactive in how you handle the retirement process.
1. “Can you afford it?”
The current economic environment has led to a rise in the number of people who are ready to retire but can’t. The common phenomenon is a hybrid; people are in retirement but they’re still working.
So, how much money do you need to avoid this situation?
To be able to answer that question, it boils down to one simple idea: your expenses need to be less than your income. There’s more to it, but that’s the basis.
Being retired means living on a fixed income without a possibility of salary increment. Also, your expenses won’t always be fixed: healthcare goes up, taxes fluctuate, and things cost more in general over time. There are assumptions you’ll need to make when saving up.
As a guideline, many financial planners advise you to start saving up to 15% of your income while you’re still in your 20s. If you want to know the exact amount, professionals estimate that you should have at least 10 times your last full-year income by retirement. Thus, if you make $100,000 in your last year of work, you’ll need at least $1,000,000. Use this online calculator to estimate how much you need.
To increase your income, start saving and investing as early as possible. Take advantage of accounts such as Roth 401(k)s and Roth IRAs.
2. “Where should you retire?”
Another thing most people overlook is the impact where they live has on their income. For instance, did you know that 13 states tax Social Security benefits while 37 don’t? Of the 13, 9 exempt tax up to a certain limit. The remaining 4 (Minnesota, Vermont, North Dakota and West Virginia) tax your benefits, no exemption.
Also, different states have different laws regarding estate and inheritance taxes. Some states have estate tax while others have inheritance tax. Yet, New Jersey and Maryland have both taxes.
You may also want to understand the different property tax rates across states. This will be crucial in helping you understand how you spend your money once you retire.
Bottom line: Understand the tax implications of your retirement state or city to save yourself from unnecessary surprises.
3. “Do you know how to maximize your Social Security benefits?”
A MassMutual quiz aimed at testing how much Americans know about the Social Security retirement benefits asked over 1,500 adults 10 basic Social Security questions and only one answered all correctly. Only 28% got seven or more questions right––this was the passing grade.
Will you be part of the many that retire without understanding how they can maximize their Social Security Benefits?
Although Social Security is designed to cover the disabled and survivors of deceased workers, is primary purpose is to assist retired workers with their monthly expenses and without it, most retirees would probably be in big trouble. According to a Gallup report, more than half of the retirees says Social Security is a major source of income.
While the Social Security benefits at Full Retirement Age (FRA) are capped at $2,687 a month in 2017, there are a number of ways that a retiree could use Social Security to boost benefits.
For instance, there’s a “Social Security secret” you can use to get an additional $15,978 each year. Retirees can influence the amount they are paid in Social Security by choosing when (what age) to claim their benefits. At FRA, a retiree is entitled to 100% of their benefits. Retiring before reaching the FRA reduces the monthly benefit. However, holding off filing for the benefits by a year increases your benefit by about 8%. This method works so well that 23% of retirees regret not waiting longer before filing.
Depending on how “lavish” you plan your retirement being, you might need a little more or less money. When in doubt, always opt for the higher amount. You never want to be surprised by post-retirement costs, and you always want to be ready.
Many economists agree that the personal savings rate in America is too low. Even though it climbed to 5.7% in late 2016, it’s still behind most other developed countries.
For instance, Switzerland households save 13.4% of their income. In Japan, workers have averaged a savings rate of 11.74% from 1970 to 2016.
For those looking to save more, what’s the solution? Obviously, making more money helps, but that may not be entirely possible for everybody.
What anyone can do right now is manage their budget better. Smarter spending equals higher savings—a good step towards ensuring a secure financial future. Here are 4 reasons why considering the impact of spending is just as important as saving.
1. A penny saved is still a penny earned
Benjamin Franklin’s famous quote is simple but profound. Anybody that’s worried about their financial well-being should remember it. Say it out loud, “A penny saved is a penny earned.”
Though most are familiar with this quote, it’s not being put into practice the way it should be. According to research from GOBankingRates, one in three Americans don’t have any retirement savings.
Cameron Huddleston, an expert columnist at GOBankingRates, believes this can be fixed. “There are plenty of obstacles Americans claim are in their way when it comes to saving for retirement,” she says. But things likes student loan debt, low wages, and a child’s education “don’t necessarily make it impossible to save for retirement.”
For those on a strained budget, the best way to save more money is to look at how you’re spending. There are many easy ways to save a few or even hundreds of dollars a month, from cutting the cord on cable to bargaining at flea markets.
2. Overspending carries future financial consequences
According to a study published in the Journal of Consumer Research, consumers overspend due to impatience and not thinking about long-term consequences. Examples of this play out every day.
For instance, 30-year olds probably don’t think about how buying a super-expensive TV today could negatively impact their quality of life at 65. That’s just so far away, and that TV can offer immediate pleasure.
This is what motivated the study’s researchers, Daniel M. Bartels and Oleg Urminsky, to look for ways to change this behavior. The two University of Chicago professors found that the solution is more complex than just thinking about one’s future self. While spending money, people must also care about their financial future. If someone doesn’t care, then spending less and saving more becomes less likely.
As Bartels and Urminsky say, “The best way to help consumers avoid overspending is to get them to both care about the future and recognize how their current behaviors affect the future.” Thinking and caring about the future is key to spending wisely today.
3. There is waste everywhere
Think of something like lean management in business. The core idea is to eliminate waste and improve efficiency. People should be applying this philosophy to the way they spend money.
Many may argue that saving is tough because all their income is spent on essentials, but research doesn’t necessarily support that claim. A survey by 24/7 Wall Street found that Americans spend roughly 15% on non-essentials (which means $15 out of every $100 doesn’t necessarily need to be spent).
Some common non-essentials include the following:
Eating out at restaurants
It’s worth noting that things that can be classified as “non-essentials” offer necessary relief from the stresses of life. Yet the fact remains that this is the primary area where wasteful spending occurs. Cut down any wasteful spending here and savings rates rise immediately.
4. Overspending leads to debt
It shouldn’t be a surprise that student loan debt can delay saving for retirement. It’s hard to stash away cash when lenders need those monthly payments.
For those that overspend and get caught in debt, the same idea applies. Habitual overspending makes getting out of debt—and saving—quite difficult.
It’s rather alarming that the average credit card per U.S. household is around $16,000. This indicates consumers are buying things without having the ability to pay in full. Carrying a credit card balance is necessary sometimes when the unexpected arises. But for many, high balances are simply a result of bad money management (overspending).
Also, since credit cards have higher interest rates, this means people are getting burnt by interest payments. That interest money could have been savings instead.
Saving more by spending wisely
In the end, it’s not necessarily about being stingy. It’s about spending more wisely. This means buying things at the lowest possible prices, staying away from unnecessary purchases, keeping credit card balances as low as possible, and more. If more folks start to pay attention to the impact of their spending, they’ll see their savings rise.
Many people spend most of their working years setting aside money in a retirement account. Whether this happens in the form of independent 401(k) contributions, employer benefits, IRAs, pension plans, or a combination of savings strategies, Americans have plenty of options available to build up their retirement fund during their working years. However, a recent GoBankingRates survey reveals that 23% of Americans have less than $10,000 saved for retirement and one-third of Americans report that they have no retirement savings at all. This means more than half of Americans have barely saved anything for retirement. So how confident are today’s retirees about their financial future? Here’s a closer look:
Making the Decision to Retire
One of the first things Americans need to consider as they approach retirement age is when they want to officially retire, or stop working and earning a paycheck. This is where the retiree would live off Social Security benefits, a pension plan, and any personal savings they have accumulated over the years. The full retirement age is 67 for those who were born in 1960 or later but it’s important to note that those who delay retirement until age 70 can qualify for more Social Security benefits. Deciding when to retire to claim Social Security benefits and when to stop earning money is important for financial planning since these decisions will influence how much money the retiree can save and enjoy during retirement.
Building Retirement Savings
Individual retirement accounts (IRAs) and 401(k) accounts are some of the most popular types of retirement plans among working Americans but there are several other options available for those looking to generate a steady stream of income through their retirement years. Getting the maximum 401(k) match from an employer through all working years is a smart way to build up retirement savings. Working for employers that contribute to Simplified Employee Pension (SEP) plans and Salary Reduction Simplified Employee Pension (SARSEP) Plans is another way to increase retirement savings.
Contributing to a Traditional or Roth IRA consistently over several years and decades will provide an attractive return on investment as long as the account holder doesn’t make any early withdrawals. Buying fixed-rate annuities before reaching retirement age or even during retirement can help to secure a guaranteed revenue stream for years to come. While these annuities provide a fixed income stream, it’s important to keep in mind that they will not adjust for inflation over the years. Those who want to take advantage of any signs of growth in the market may fare better with variable annuities. Working with an experienced financial planner can help to determine investment priorities and create an attractive retirement portfolio.
Low Confidence in Retirement
AARP recommends calculating living costs at 70 to 80 percent of preretirement income but many financial planners suggest planning for 100 percent of preretirement income for at least the first 10 years after leaving the workforce. According to the Employee Benefit Research Institute, 24% of workers were not at all confident that they had saved enough money for retirement while 36% were somewhat confident, as of 2014. Whether they’ve lived a long life of struggling financially and never made room for savings or simply had other financial priorities, it’s clear that many retirees cannot expect to live comfortably without a paycheck or other sources of income. Some may end up depending on family members for financial support while others will continue working during retirement to pay for basic expenses.
Individuals approaching retirement age who plan to work and earn through their retirement years may be able to recover any missed savings opportunities from their youth. Prioritizing finances and making an effort to cut costs can also help to reduce living expenses and maximize a retiree’s savings potential. With so many retirees dissatisfied with their retirement nest egg — and many without any retirement savings at all — it’s important for all Americans to make retirement planning a priority at an early age.