The primary financial objective for the majority of Americans is retirement. However, for several individuals, that objective appears to be mostly driven by ambition rather than concrete steps taken towards its achievement.
Roughly 50% of individuals who retire at the age of 65 will be incapable of sustaining their pre-retirement standard of living.
We understand your want to be in the remaining portion. Here is the method to achieve this.
1. Achieve an annual savings of 15%.
Previously, it was commonly advised that one might achieve a secure retirement by yearly saving 10% of their household income. Nevertheless, certain experts recommend increasing that percentage to 15%.
Various factors, including increased life expectancies, potential decreases in future investment returns, and the decline of pension plans, necessitate workers to contribute more money to their accounts.
2.Save almost 15%!
The 15% recommendation is derived from two fundamental assumptions: commencing savings at the age of 30 and targeting retirement in the mid-60s.
Nevertheless, in the event that you have commenced later than expected, it may be necessary for you to accumulate a greater amount of savings. For instance, if a worker reaches the age of 40 without any savings for retirement, it is advisable for them to save 25% of their household income.
Additionally, there is the specific age at which you aim to retire. Numerous individuals aspire to escape the competitive and monotonous lifestyle well before reaching their sixties. Take into account the adherents of the FIRE (financial independence/retire early) movement, who diligently set aside 40%, 50%, or even higher percentages of their earnings with the objective of achieving retirement at the earliest opportunity.
3. Save for the Biggest Expenses.
A key to a secure retirement is limiting your current consumption in order to fund that future consumption. You’ve likely heard of financial gurus claiming you could be a millionaire if you give up your daily latte. While every little bit does indeed help (when compounded over decades), your financial destiny is more likely determined by how much you spend on the three biggest categories in the typical American’s budget:
Housing:
housing expenses eat up a third of the average budget. Buying or renting only as much space as you actually need, and in locations that are not highly priced, can free up hundreds of dollars each month.
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Transportation:
The price of a new car is almost $40,000. Consumers are taking out bigger, longer-term loans to afford these cars, and in many cases still owe money on a car when they replace it.
The key to driving down these costs: Buy small to midsize fuel-efficient vehicles, and keep them for 10 to 15 years. Getting a car to 200,000 miles saves $30,000 on average.
Food:
Americans waste 30% of the food they buy. Since the average household devotes 13% of its budget to food, that’s almost 4% of annual earnings going in the trash.
4. Optimise the utilisation of your retirement accounts.
There are others who also desire for you to retire in the future. Both Uncle Sam and potentially your employer are willing to provide assistance.
This provides assistance through accounts that offer certain tax benefits. An example of such an account is an Individual Retirement Account (IRA), which is accessible to anybody who receives earned income, such as a paycheck.
The remaining accounts are provided by your employer (or by yourself, if you are self-employed). These options encompass 401(k)s, 403(b)s, and the Thrift Savings Plan (TSP). In addition, your employer may enhance the agreement by matching your contributions to your account.
What are the tax benefits associated with these accounts? The answer varies based on the category:
Contributions made to a Traditional IRA, 401(k), 403(b), or TSP have the potential to reduce your taxable income, leading to a decrease in your tax liability for the year in which the contribution is made. In addition, you will be exempt from paying taxes on the interest, dividends, or capital gains that are earned by your assets in the account annually. However, any funds taken out from the account are subject to taxation at the same rate as regular income.
Roth IRA, 401(k), 403(b), and TSP are several types of retirement savings accounts. Contributions do not provide any tax advantages, however, investment gains and withdrawals are exempt from taxes as long as the regulations are adhered to.
Utilising these tax incentives can significantly enhance your retirement savings by tens of thousands of dollars, in contrast to the amount you would have accumulated if you had invested in a conventional bank or brokerage account.
5. Make long-term investments at this moment.
To ensure the success of your portfolio, go for investments that offer appealing long-term returns. Ibbotson Associates has provided the compound average annualised returns for the primary investment categories spanning from 1926 to 2019.
Equities with a high market capitalization (such as those included in the S&P 500 index): An average annualised return of 10.2%.
Government bonds offer an average annualised return of 5.5%.
Treasury bills, which can be seen as equivalent to cash, have an average annualised return of 3.3%.
The stocks’ superior returns make them the preferred investing option at The Motley Fool. Acquiring them is as easy as purchasing an S&P 500 or whole stock market index fund, which, with a single transaction, grants you real ownership of numerous major global corporations.
6. Utilise the benefits of catch-up contributions.
If you have fallen behind in your retirement planning, your mid-50s present an excellent opportunity to make up for lost time by significantly increasing your funds. Uncle Sam concurs, hence the higher contribution limits for retirement accounts for individuals aged 50 and above.
It is crucial to acquire knowledge about the programmes that will exert a substantial influence on your retirement, such as:
Social Security:
Benefits can be claimed starting at age 62, but, the earlier you apply, the lower your monthly payment will be. What is the monetary compensation for delaying? The payout experiences an annual increment ranging from 6% to 8% till the individual reaches the age of 70. Research indicates that the optimal age for most Americans to begin claiming Social Security benefits is 70. However, regrettably, the majority of individuals do not adhere to this recommendation.
A defined-benefit pension:
it is a retirement plan that guarantees a specific amount of income to an employee upon retirement. If you belong to the privileged few who will get a monthly payment from your previous employer for the duration of your life, it is important to thoroughly comprehend the calculation method and explore the various choices available to you. Does delaying retirement lead to a greater financial advantage? Is it possible to receive the pension as a single payment instead? Is the pension adequately funded, or is there a possibility of future payment reductions?
Medicare:
Employers typically bear 70% of the expenses associated with health insurance. However, after you resign from your employment, you are solely responsible for yourself. Thankfully, Medicare, the health insurance programme designed for individuals who have retired, becomes effective after they reach the age of 65. Prior to your retirement, ensure that you comprehend the extent of coverage provided by Medicare and determine whether you require supplementary insurance.
7. Financial allocation for an extended period of retirement.
The term “financial independence” is sometimes used interchangeably with retirement by certain individuals. Although it is comprehensible, the reality is that your reliance only transitions — from a salary to your investment portfolio.
Ensuring a secure retirement entails departing from the working exclusively when you own sufficient cash. Research indicates that around 50% of individuals who retire at the age of 65 will need to reduce their standard of living. However, this figure decreases significantly to only 15% for those who retire at the age of 70. This demonstrates the significant impact of accumulating additional savings over a longer period of time, as well as the advantage of postponing the commencement of Social Security benefits.
Another crucial consideration is the annual withdrawal of a sensible sum. As a result of historically low interest rates on cash and bonds, the previous 4% rule may no longer be as secure as it once was. According to certain studies, it is suggested that a range of 3% to 3.5% may be more optimal. Alternatively, one can use the percentages that determine needed minimum distributions to determine the amount a retiree can spend annually.
Lastly, contemplate your supplementary resources, including as the equity in your home, life insurance, rental properties, and other valuable assets, which you may liquidate or use as collateral in the event of investment returns falling below expectations or unexpected needs arising.
8. Seek assistance for retirement planning.
If you have arrived to this juncture and are experiencing a sense of being inundated, we empathise with your situation. Retirement planning involves numerous components that require careful consideration and coordination.
If you believe that you would gain advantages from receiving professional and impartial advice, you should contemplate employing a financial planner who charges fees exclusively. Certain individuals will actively oversee and administer your financial resources (and levy a percentage fee based on the value of those resources), while also offering retirement evaluation. In contrast, some individuals solely offer guidance and charge based on the duration of their services or the scope of the project. It is advisable to consult with a retirement expert every five to 10 years, and particularly prior to retirement, to verify that you are doing all necessary steps to achieve the desired retirement outcome.
