When you make a list of the things you spend money on – be it rent, groceries, internet, movies, et cetera – do you include your future? Knowing just how much money you will have available in retirement can influence your financial stability and the freedom to live the life you want. Whether you’re thirty days or thirty years away from retirement, now is the time to assess your future income.
Many factors play into a well-established retirement plan, but for now, we’re going to touch on two major parts: (1) building current savings for future income and (2) creating a spending plan for that income.
Things to Consider as Future Income Sources
Did you know that over half of Americans (56%) will most likely fall short with their finances in retirement?¹ Assessing how much you are currently saving and what your projected income will be in retirement can help you determine if you will have enough money later in life. Here are some income sources to consider during your review:
You can check your yearly earnings, as well as what your distributions will be, by visiting ssa.gov. Unfortunately, Social Security isn’t as reliable as it used to be for covering a majority of retirement income. Reviewing your Social Security earnings can help you determine how much money you need to accumulate using other savings vehicles so that you can meet your retirement goals.
401(k) or Other Workplace Retirement Plans
Chances are you have some kind of retirement savings plan available through your employer. If you haven’t started contributing to this account, you could be leaving money on the table. Many employers will match employee contributions to a certain extent, so it’s a good idea to try and contribute at least enough to get the full match.
If you already contribute to a 401(k) or 403b or the like, reassess how much you’re contributing and what it will amount to in the future. (Want a calculator that’ll do the math for you? Ask your Money Coach.) This assessment could reveal that you need to contribute more each month in order to meet your income goals for retirement.
Do you have bonds or annuities? Or maybe a target date fund you forgot you had? When you assess your retirement savings, consider dividends from your investments. While annuities and target date funds are typically for things like additional income in retirement, they also come with risk and responsibilities.
For investments like target date funds where you make an investment but won’t necessarily touch the dividends until later in life, you run the risk of the market not doing well when you finally cash in, or the company/issuer defaulting before you gain your returns, so keep this in mind when you determine how much you will rely on investments for future income.
Individual Retirement Account
You have two main options when it comes to opening an Individual Retirement Account (IRA): Roth versus Traditional. Roth IRA contributions are taxed upon submission; whereas, Traditional IRAs usually require paying income taxes when you take distributions. Look at it this way: when you retire and see $100,000 in your Roth IRA, you typically have $100,000 available to you, but when you retire and see $100,000 in your Traditional IRA, you actually have less than $100,000 available because a portion of your earnings goes toward taxes. Nevertheless, a Traditional IRA may be a better choice tax-wise if you think you will be in a lower tax bracket (than you are now) when you start taking distributions.
All that to say, when you calculate how much your IRA will be worth in retirement, make sure you consider taxes, fees and penalties, which might affect just how much money you have available to you.
Things to Consider for Your Future Budget
Building a budget takes imagination. This is your time, your money. What do you want to do with it? Of course, you’ll probably still have a house payment and utilities and insurance, but what about travel and family time? Here are some things to remember when creating a retirement spending plan.
Lavishing the Grandkids with Gifts
Many people find that their future goals center on the family, which often means trading hours spent at a desk with hours spent on family-friendly adventures, and that costs money. You could be taking your grandkids to see the latest Disney movie (which could easily cost $50 once you factor in tickets, popcorn and candy), planning day trips to the zoo or local theme parks (which cost more than the movies), or whatever else your grandkids find interesting.
When you create a spending plan for retirement, consider allocating a portion of savings towards family gifts and events. Planning ahead will make the costs less of a financial burden.
Exploring the Great Outdoors
Leave your dreary cubicle behind and discover new countries! Just remember to save up for the plane ticket, updating your passport, buying souvenirs (You know the kids will ask for them.), and enjoying new cuisines.
How much will hotels or cruises cost? Will you use a travel agency with service fees? What about travel costs once you’re on the ground – cab fare, metro tickets, train rides? And don’t forget to factor in the cost of shows, museums, bus tours and the like.
If you still have quite a few years before retirement, you may not be able to know the exact amount you will need, but looking at current prices for what you want to do will give you a good starting point.
Did you know that according to the U.S. Department of Health and Human Services, almost 70% of people will need some kind of long-term care in retirement?²
One of our money coaches, who is a Retirement Specialist, likes to remind her clients of the financial impact that might arise from one spouse needing nursing care while the other is still healthy enough to live in their home. In essence, that would mean supporting two households.
Remember, there are different ways to get financial coverage for long-term care: long-term care insurance, long-term care annuities, and insurance policies with long-term care riders. Each option has pros and cons, as well as different costs to you, so make sure you talk with your Money Coach to determine the best option for your situation.
Things to Consider Today
Figuring out where your income will come from is important, and deciding what it will go towards is the fun part! This is where you get to determine your goals, plan your adventures, fill up your newfound free time, and ensure you have the funds to make it all possible.
Your Money Coach can help you plan and prepare for the best retirement ever. Together, you will determine the lifestyle you want; then your coach can walk you through an in-depth retirement analysis, so you can calculate how much money you need to save for your goals and how to adjust current savings contributions to meet those goals. Start now by calling 888-724-2326.
¹Woolley, Suzanne. “Here’s the Toll that Student Debt can Take on Retirement.” benefitsnews.com. EBN, 4 Feb. 2016. Web. 5 Feb. 2016.
²“How Much Care Will You Need?” longtermcare.gov. U.S. Dept. of Health and Human Services, n.d. Web. 8 July 2016.
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