Finances —you’ve got them covered, right? You’re paying your bills and living within a budget, with maybe a bit extra left over at the end of the month. If, however, you’re not putting away money for retirement, you’re missing a golden opportunity to build a better long-term future for yourself.
You’re not alone. The 2022 Survey of Consumer Finances, run by the Federal Reserve Board, found that half of American households had no savings in retirement accounts at all, while only 21% have saved more than $100,000 towards retirement.
Why is starting to save early for retirement important? The money you put away now is especially valuable because it will have more time to accumulate interest before you are ready to retire. Early retirement dollars are effectively “super dollars” with the capacity to grow more over time than funds you invest later.
Where can you learn more about how to plan for retirement? We’re glad you asked. Welcome to retirement planning 101.
Smart Moves: How to Plan for Retirement Now
Saving for retirement is essential, but retirement planning is a comprehensive financial strategy. Here are 10 important steps to help you set up your retirement savings for long-term success.
1. Set specific goals
It might be hard to imagine now, but thinking carefully about the type of retirement you want is a good way to set yourself up for long-term success.
What does your ideal retirement look like? Do you plan a quiet retirement surrounded by family and friends, or do you plan to travel the world or live by the sea? Having a clear picture of where you want to be will help shape the financial decisions you make today.
2. Making saving a habit
Make setting money aside for retirement a part of your monthly budget, not an afterthought. Treat your retirement as you would any other expense like paying your rent or utilities.
You can even automate savings by having money deducted from your paycheck when it arrives and deposited in a dedicated savings account. Even setting aside a small amount each month will grow into a significant nest egg over time if you do it consistently.
3. Pay down ‘bad’ debt now
It’s hard to save effectively while carrying high-interest debt, like credit card balances. Prioritizing the repayment of this debt—whether by paying it off aggressively or consolidating it into a longer-term loan—can significantly improve your financial outlook for the future.
4. Start an emergency fund
Unexpected events, such as medical emergencies, unplanned expenses, or a loss of income, can derail even the best retirement plans, leading to more debt and reducing your ability to contribute to retirement savings.
To protect against these situations, aim to build an emergency fund with at least three months' worth of living expenses. It may be challenging to set aside extra money, but this fund can help you avoid debt and preserve your retirement savings when the unexpected happens.
4. Contribute to a 401(k)
Employee-sponsored retirement plans are a valuable benefit, even at the start of your career, because the annual limit on contributions is much higher than for private IRAs.
Make the most of yours by arranging to contribute from your paycheck each month. If your employer offers to match contributions, be sure you put in the maximum matching amount to take advantage of this “free money”.
5. Set up an IRA
If your employer doesn’t offer retirement benefits, or even if they do, it’s wise to set up an individual retirement account. Like a 401(k), this provides a tax-advantaged way for your money to grow over time. Check with a financial adviser whether a traditional or Roth IRA is best for your needs.
6. Leave it alone
When your retirement savings start to grow, it can be tempting to dip into them for big expenses, like home renovations or college tuition. However, it’s important to avoid this temptation. Withdrawing early from an IRA or 401(k) often comes with penalties and taxes, and it can set back your long-term savings goals, making it harder to recover the lost funds.
7. Take care of your health
Staying healthy is important, as healthcare costs tend to rise with age and can significantly impact your retirement savings when you need them most.
You can plan for future healthcare costs by finding out how much you are likely to benefit from Medicare, and consider taking out supplemental health insurance or contributing to a Health Savings Account (HSA).
8. Get wise about Social Security
Your income in retirement will be a combination of Social Security payments and proceeds from your own retirement savings. Opening a “my social security” account online allows you to predict how much social security you will qualify for in retirement.
9. Diversify your investments
Once you have built up a reasonable-sized nest-egg in savings accounts or an IRA, consider putting your retirement funds into other types of investments. This can help “recession-proof” your portfolio as financial conditions change and different assets perform better than others.
For example, investing directly in stocks or mutual funds can earn you great dividends when the economy is growing, but the guaranteed income from federally-insured share certificates and some types of bonds can protect your retirement portfolio when times are tough.
Remember also that not all investments will offer the same tax advantages of 401(k)s and IRAs. In most cases you will be taxed on income before you can invest it, and you will likely have to pay capital gain tax on your earnings.
10. Ask a professional
We’ve suggested several ways that beginners can prepare better for retirement, but it may help to speak with a financial counselor to get the best advice for your long-term goals.
Common Sources of Retirement Income
Many young people are unaware of all the potential sources of retirement income. Below, we summarize some of the most important.
|
Common Sources of Retirement Income |
|
|
Income Source |
Description |
|
Social Security |
Federal benefits based on earnings throughout your career. Full benefits usually start at age 66-67, with reduced benefits at 62. Social security payments are also taxable if income exceeds IRS limits. |
|
401(k) Plans |
Employer-sponsored accounts with tax-deferred contributions. Withdrawals made from age 59½ are taxed as income. Employers often match employee contributions up to a certain limit. |
|
Traditional IRAs |
Tax-deferred accounts for individuals. Contributions may be deductible. Voluntary withdrawals are taxed as income after age 59½. Required minimum distributions (RMDs) start at age 73. |
|
Roth IRAs |
Funded with after-tax contributions with tax-free withdrawals after 59½ if the account has been open more than five years. No RMDs. |
|
Simple & SEP IRAs |
Specialized IRAs designed for employees of small businesses (SIMPLE) and self-employed individuals (SEP). Similar contribution, withdrawal and taxation rules to traditional IRAs. |
|
Annuities |
Insurance products funded by regular contributions and providing guaranteed income in retirement. Annuities may allow both tax-deferred and after-tax contributions. Earnings are always taxed. |
|
Health Savings Account (HSA) |
Specialized savings accounts that allow tax-free withdrawals for medical expenses. After age 65, withdrawals for non-medical expenses are taxed as income. |
|
Taxable Investment Accounts |
Investments in stocks, bonds, mutual funds, and property trusts made outside retirement accounts. Made with post-tax earnings. Capital gains tax is charged when assets are sold. There is a risk of losing both your investment principal and earnings. |
|
Share Certificates |
Also known as certificates of deposit, these are fixed-term deposits offered by credit unions and banks. These earn higher interest than regular savings accounts and are insured by the federal government in the same way as regular deposit accounts. Earnings are subject to capital gains tax. |
5 Retirement Planning Mistakes to Avoid
While there’s plenty of advice on what to do when planning for retirement, it’s just as important to know what not to do. Here are some common retirement planning mistakes to avoid.
1. Starting too late
The biggest mistake you can make on your retirement savings is delaying starting. Not only do you miss out on the full effect of compound interest over the years, but you also do not get the benefit of the tax savings available from 401(k)s and IRAs.
2. Underestimating retirement expenses
Estimating retirement expenses can be challenging, especially with inflation over time. One thing you can count on is that your needs will likely be higher than expected, so it's important to start maximizing contributions early.
3. Forgetting to plan for taxes in retirement
Savers often forget that the money contributed to 401(k)s and traditional IRAs is taxable on withdrawal. This can come as a shock if you expected to access the full lump sum of your savings. This can be a particular problem if you are in a higher tax bracket during retirement than when you made the contributions.
You can lessen the impact of taxes on your savings by opening one or more Roth IRA accounts, where contributions are made from your after-tax earnings, grow tax free, and can be withdrawn tax free after age 59½.
4. Failing to increase contributions
Many young people do begin to set aside small amounts for retirement early in their career, but they often slip up by not increasing their contributions as they get older.
Boosting your contributions is important because it reflects that you have less time remaining to contribute, as well the diminishing returns of compound interest on new contributions. You should also contribute more because you should ideally be earning more income over time.
5. Not having a withdrawal strategy
Knowing how much to withdraw from your savings and when is essential for a successful retirement. Without a plan, you risk depleting your funds too early.
A common guideline is the 4% rule, which recommends withdrawing no more than 4% of your savings each year. While it may not work for everyone, it offers a helpful benchmark for how much to save.
Get Smart About Retirement Planning with SCCU
At Scenic Community Credit Union we’re committed to helping you live your best financial life. That means putting retirement planning front and center when we’re advising our members on how to save and invest for the future, and backing it up with the quality products and great rates you need to do just that.
Check out our Retirement Central online resource for smart and sensible saving advice for every stage of life, handy FAQs, and the tools you need to calculate your retirement journey down to the dollar.
You’ll also find links to our retirement products, including our traditional and Roth IRAs, which can each be invested as either a regular Accumulative account or term-based IRA Share Certificate Account.
It all starts when you become a member at Scenic Community Credit Union. Contact us for more information, or click below to join us!