It’s no secret that the state of retirement readiness in America is lacking. Per a 2016 report by TIAA, nearly 2/3 of American adults surveyed said they were not concerned about running out of money in retirement. Yet, only 46% of that same group knew how much they had saved for retirement, nor did most know how much they would need to live on in their retirement years. It seems like many of us may be suffering from a false sense of confidence.
The good news is more people are contributing to the retirement plans offered by their employers than ever before. What’s great about these plans (401k, 403b, etc.) is they offer the path of least resistance for retirement planning. Many plans will auto-enroll new employees, deposits come directly out of your paycheck, and employers often match contributions to encourage their employees to participate. If your employer does offer a match, taking advantage of it is a great first step because it’s the closest thing you’ll find to free money anywhere.
However, it’s just that – a first step. Many people think contributing up to the match is enough. It scratches the retirement planning itch. Many financial studies suggest saving a minimum of 10-15% of your income for retirement. If your employer offers a 3% match and you stop your contributions there, that’s only 6%. It’s a good start, but not enough for long-term financial stability. Again, this should be your retirement starting point, not the finish line.
Have you ever wondered how much retirement income your nest egg could produce? It’s a simple question with complicated answers. We financial planners like to use the “4% Rule” as a guide post. The 4% Rule says that withdrawing 4% or less annually from your portfolio gives you a strong chance of not running out of money over a 20-30 year horizon. Again, this is a rule of thumb, not set in stone nor a guarantee. That means a $1,000,000 portfolio may generate up to $40,000 per year. Is that enough for you to live on each year?
If you have other sources of income such as a pension or rental income, that can help ease the burden on your portfolio. Social Security is another important component to retirement planning. However, there is uncertainty to the program’s long-term viability so younger generations would be wise to plan on it being a smaller piece of the pie.
Bottom line, you need to have a realistic view of retirement. It’s about maintaining your standard of living when you are no longer earning an income. It isn’t a pie in the sky and you can’t close your eyes and hope it will work out.
So, what can you do about it?
We advocate saving as much as possible. Around 10%-15% is a good place to start, but aim toward a savings goal of 20%-25% of income. Also, track your expenses to better understand what you need now to live on and how that may compare to when you retire. Regarding your company retirement plan, here are some best practices:
- If you have a company retirement plan and are not participating, enroll ASAP
- If you are participating but only up to the match, boost your contribution amount (increasing your contribution will reduce the size of your paycheck so make sure your budget can handle it)
- If your plan allows for it, set an automatic contribution increase each year (you probably won’t notice the difference)
- If you already max out your 401k but you still below the 15% mark, make additional contributions to a brokerage account or Roth IRA (income limits apply)
- If you receive a bonus or commission from work, invest a portion in a brokerage account or Roth IRA
Overall, you need to have a plan! Financial success does not happen by accident nor does it occur overnight. Recognize that what you’re doing now may be a good start, but there is often more work to be done. Taking steps such as these will get you headed in the right direction and give you more confidence about your long-term financial future.