It was the poet Antonio Machado who said, “We make the road by walking.” All of us are on the path toward retirement, whether we admit it or not. If you haven’t started thinking about it or don’t even know where to begin, you’re certainly not alone. According to one study by the Financial Industry Regulatory Authority (FINRA), only 39 percent of American workers have sat down and figured out just how much they to save. For the other 61 percent, here are seven simple steps you can take to start making your path to retirement today.
STEP #1: Figure out how much money you need.
Ten million? Twenty million? Fifty-five million? These were all answers given by working Americans thinking about retirement when asked by the New York Times, “How much is enough?” What will make you happy during retirement? It’s not just about the money. Wealthy people with assets in the millions only spend about $20,000 more a year than those who aren’t wealthy, and that extra money has no bearing on their daily happiness, according to a 2015 research paper. Instead of reaching for random, pie-in-the-sky numbers that might keep you from saving in earnest, take a real look at what you are spending now. The easiest way to do this is to look at your credit card and bank statements. Add up the totals coming in and out of those accounts every month, and divide by twelve. That will give you an average monthly amount.STEP #2: Ask yourself, what will change?
Expenses during your working years might be different than expenses during retirement. For some people, they will be the same, for others, they could be higher or lower. Experts suggest planning for 70 to 80 percent of your income, but there are other factors to consider. First, you won’t be putting an amount into your 401(k) plan or investments every month. You also won’t have work expenses such as travel costs and dry cleaning. All of these things might actually lower your monthly expenses. On the other hand, when you’re retired, every day might feel like the weekend, which is when people tend to spend the most money. Ask yourself, what kinds of activities do you plan to do when retired? Kayaking? Golf? Art classes? Assign a dollar amount to those activities so that they can become part of your retirement lifestyle.STEP #3: Take a look your tax implications.
Assuming you’ve completed steps one and two, you now have a number to shoot for. Let’s say you’ve decided that you need $75,000 a year to live on. Now, take a look at your retirement accounts from a tax standpoint. Money that is in a traditional IRA or a 401(k) has been growing tax-deferred, so that means when you take the money out, you will have to pay income tax on those funds because the taxes haven’t been paid yet. If the money you’re using to pay the bills is coming from a Roth IRA, then the money you take out will be tax-free. The second tax area is deductions. During your working years, many people rely on deductions to help lower their tax bill. Typical deductions include the interest charged by a mortgage and tax credits for dependents, both of which may not apply to someone newly retired. Before making assumptions, speak to tax professional, or consult an advisor who is familiar with the tax treatment of retirement assets.STEP #4: Understand your Social Security benefit.
If you’re currently working and not receiving Social Security, then the Social Security Administration will mail you an estimated benefits statement at ages 25, 30, 35, 40, 45, 50, 55, and 60, unless you have registered for an online account. You can register online for a “My Social Security” account as a way to not only access your information but protect it. Creating a “My Social Security” account can eliminate the risk of someone else trying to claim your benefit in your name, even if they obtain your Social Security number. There are many factors to think about when claiming your Social Security benefit, the most important being timing. Waiting to file can increase your monthly benefit amount by as much as 32 percent. On the other hand, waiting without a strategy might not be the best recourse either.STEP #5: Identify other known sources of income.
For most retirees today, Social Security is a known source of guaranteed income that will last as long as you live. In fact, among those who are elderly, Social Security represents 50 percent of retirement income for married people and 71 percent for those who are unmarried. The next step to planning retirement, then, is figuring out what will replace the other 50 percent and 29 percent respectively. Do you or your spouse have a pension? Will you be receiving any book royalties? Any rental income? Do you have a part-time business?STEP #6: Calculate your income gap
The difference between your known sources of income and the number you need to maintain your lifestyle is known as the income gap. For example, if you know you need $5,000 a month to live on, and your Social Security benefit comprises $1,800, and you don’t have a pension, then your income gap is $3,200. If you are in the 25 percent tax bracket, then you will also want to calculate that 25 percent of your income will go to taxes. The other erosion factor to consider is inflation, which over the long-term in the U.S. has proven to be 3.22 percent.STEP #7: Fill your income gap
Social Security, taxes, inflation, known income—phew—that’s a lot to consider. And now, to make things even more complicated, your final task is to turn an eye to your 401(k), IRA, and/or brokerage accounts and ask yourself, “How am I going to turn this pot of money into what I need to fill my income gap?” If you know you need $4,000 a month, for example, to fill your income gap and cover your taxes, how will you get that money? Perhaps the easiest solution is to use some type of an annuity. An annuity is a contract between you and an insurance company where, in exchange for a sum of money, the company agrees to pay you a certain amount. That amount of money can be set for a period of years, or for life. It can also be set to cover one life or two, depending on the type of annuity you choose. Got questions? No problem. There’s no reason why you have to figure this out on your own. You can get free annuity and retirement income planning feedback right here without having to talk to a high-pressure sales agent and without even making an appointment. Simply fill out our simple form, ask your questions, and one of our advisors will be happy to get back to you. In the meantime, keep taking those baby steps and one day, your path will lead you to the retirement lifestyle you crave.
