Thinking about saving for retirement? How long do you have before you retire? What is your current salary? All these questions and more directly affect how much you can save for retirement. If you are wondering how you should manage your savings for a comfortable retired life, read on!
Start Early:
When you start thinking of the age you should start saving, you also have to take into account your approximate life expectancy, how much you are spending to maintain your present lifestyle, and if you would like to maintain the present lifestyle post-retirement.
A basic rule of thumb is that the sooner you start saving, the more you will be able to save for retirement. When you are young, you have fewer responsibilities, more capacity to face risk, and the opportunity to save in small quantities per month to fuel your post-retirement life . Also bear in mind that you may have to pay much more to maintain the same level of lifestyle after your retirement. As you grow older, different priorities come up in life and you may also have to support dependents and spend more on healthcare. Hence, the earlier you start, the better equipped you will be to take care of your needs and lead a comfortable life post retirement. If you start early, you also have the opportunity to modify your plans if the need presents itself.
Saving vs. Investing:
Often used synonymously, there is a major difference between investing and saving. Learning this difference is crucial to your retirement plan. Putting aside a part of your earnings into the bank for use at a later date or in case of unforeseen circumstances is called saving. There are higher liquidity, low risk, and interest involved. People generally save for specific occasions – vacations, weddings, buying a house or for unexpected contingencies, etc.
People invest their money with an understanding that it will grow in value with time. There are a lot of avenues you can invest in – you can put your money into securities, real estate, commodities, etc. Since the returns are higher than when you simply save your money in your account, the risks are higher too. People can invest for their retirement or to fund their children’s higher education.
Saving your hard-earned money is a good practice to sustain short term goals and gives you more liquidity. However, it is better to pick investing over saving to fund your retirement plans since there is a higher chance for your money to grow substantially over the years.
Consider your Future Income Sources and Expenses:
You should familiarize yourself with your income sources and expenses before you start computing your savings for retirement. Consider all the sources that generate your income currently and those which might generate income in the future. Post-retirement can be financed by –
- Social Security
- Pensions
- Retirement Accounts such as the IRA or 401(k)
- Savings or Investments
- Income from rent
- Insurance
On this note, you also need to consider all avenues of current and future expenditures. Some expenditures you can expect to incur could be for:
- Recurring expenses like food, clothes, etc.
- Housing
- Healthcare
- Utilities
- Traveling
Once you have your expenditures and income streams figured out, it will become easier for you to calculate and find out whether your income would suffice to meet the expenses after retirement or not. Further, you will also be able to allocate your income sources more efficiently to fuel your retirement plans
The 4% Rule:
The 4% Rule is a simple directive that can help you decide how much you can withdraw from your retirement fund each year after retiring. All you need to do is consider 4% of your total wealth and that becomes the amount you can withdraw per year from the year you retire. In the subsequent years, you can modify that amount to adjust for inflation. Assuming that your retirement fund is for 30 years, by this rule you will be able to use up your funds comfortably for the next three decades.
Although, there is one thing that you need to consider while using this rule. Generally, not everyone needs to use the same amount every year. You can adjust the withdrawal amount according to your plans – therefore If you foresee any major expenses in a particular year and have fewer expenses in another, adjust accordingly to prevent your fund from exhausting.
Savings by Age:
It is well-established that if you start saving early, you can save more by the time you retire. But as life goes on, your preferences and priorities in life keep changing. If you started your career in between your 20s – 30s, investment management firms advise that you must save at least 15% of your pre-tax income per year and contribute generously to retirement plans which are sponsored by your employer. If you are in your 30s – 50s, then you are probably earning more but you may also have more responsibilities and dependents. However, this is the time you need to think seriously and start saving more than earlier. If you are in your 50s-60s then you are probably nearing your retirement age and it may become difficult for you to save with all the extra expenses in your life. But if you plan well, you can still save some amount for your retirement.
Delay Retirement:
For every month you delay retiring, the perks and advantages that you receive after retirement keep increasing per month. It is simple – the more time you delay retiring, the more you will be able to put into savings and investing. However, ensure that you get signed up for your health insurance coverage at the right moment to enjoy these benefits. With more years of working, you can postpone the benefits you receive from the 401(k) withdrawals as well.
Social Security benefits will also keep increasing if you delay in claiming them. You will be giving more opportunities to your savings account to grow by delaying. Also, you will get an opportunity to contemplate more and plan better the ways in which you are going to spend your time with comfort after retirement.
Be aware that in some cases, you may also need to pay an early withdrawal penalty for retiring early! Aside from pecuniary benefits, delaying retirement also means you remain in contact with your professional life for a longer duration. Also, the more you work, the lesser the number of years you will have to finance yourself without work, reducing your financial vulnerability.
The Bottom Line:
Conclusively, the planning that you need to undertake with respect to your savings will all depend on the lifestyle you want to live after you retire. Of course, your current income and sources are the primary factors that decide it. It will be surprising to know that not many people are saving adequately for retirement. Once you know precisely what your objectives are and you follow the various tips offered by experienced advisers that have been tested over time, you can easily live comfortably post-retirement.
