Am I On Track to Retire?
As an Advisor, often the first question that we are greeted with is “am I on track to retire?” While this may seem like a simple question that could be met with an even simpler answer, the answer largely depends on you. I don’t mean what you’ve done, how much you’ve saved, or what performance you’ve received, although those are equally as important as the next, they are just variables in the equation. We want to know the answer to the equation when we ask this question, and although the world is an ever-changing realm of possibilities (now more than ever), the answer is relatively simple, but is arrived at by another question: What lifestyle do you want to retire into?
Theoretically, if you can live on what 4% of your entire retirement portfolio is, you are able to retire. Does that mean that you can still retire and keep a mortgage, car payment, and frequent vacations to Destin in the fall? For hypothetical purposes, let’s say that you can’t. Here are a few things that you can do to maximize your pre-retirement savings and build the best life for yourself in retirement.
· Plan for retirement early
o We have all seen the old adages that show the power of compound interest for savings. We see that if you invest $1000 for 10 years at 25, you end up with more than someone who invests $1000 a year for 30 years starting at 35. (Assuming an 8% return). As cliché as it sounds, the old adages are correct. The best advice is to start early, and set yourself up for the future. Now imagine the same scenario, but not just for 10 years. Saving for retirement from the time you begin working, until you retire, knowing that the average person in the United States lives until 79 years, and this number will in all likelihood continue to rise. This means we have to live, on average, for 14 years on our funds we accumulated.
· Make sure you are maximizing your employer match on your 401k
o One of the most crucial points to a retirement is collecting the match from your employer sponsored retirement plan. Whatever contribution amount your plan requires you to make to get the maximum match is what you should be making, if you can afford to do so. Otherwise, we are just leaving free money on the table. Prioritize this first, and make sure that this is one of your keys moving toward retirement, as it will likely be a sizable portion of your retirement income.
· Understand that Social Security will likely not be enough income alone to live on
o The topic of heated debate, basic math shows that without significant adjustments and funding to Social Security, the fund will be near exhaustion in our lifetime. Whether or not this legislation will come or not is to be seen, but one thing to be certain of is that social security will be incredibly difficult to live on by itself. (I would advocate for future generations to be granted the ability to opt out of SSI before they begin working, with the assumption of increasing the contribution limits to individual retirement plans, and allowing them to plan for themselves if they are so inclined, but that’s neither here nor there, and likely will never come into service).
· Understand the benefits of a Roth
o Something that always stuns me is how few people are educated on Roth 401k options from their employer. A Roth essentially says this: We will allow you to contribute to our retirement plan, but you will pay taxes on whatever you contribute now. However, you will not be taxed at withdrawal, and will not be taxed on the gains in your account, as long as you withdraw the funds in retirement. For instance, you could pay no tax now in a traditional 401k, and during retirement, you will pay tax on any distribution you take. With a Roth, you will make contributions now with after-tax money, allowing for tax free withdraws in retirement. This could potentially save you thousands (if not hundreds of thousands) in taxes over the course of your life. One thing to note with a Roth that confuses many people is whatever company match you are receiving will still be traditional, and pre-tax contributions, which will be subject to tax in retirement. Think of it as having two buckets, one you can pull from with no tax, because you already paid tax on it at contribution, and one that will have traditional taxation. If you are already in a traditional retirement plan, fear not. You still have the ability to switch to a Roth, and it may be wise to do so. Any money you have accumulated will stay in your traditional ‘bucket’ and any funds you accumulate moving forward will be in your tax free withdraw bucket.
These are just some of the things that you can do to stay on top of your future, and plan ahead for retirement. If you don’t think you are on track, don’t stress. It is almost always possible to build a successful retirement strategy, it may just require some extra financial commitment and frugality. Be wary of things you may read online or people that tell you exact percentages of what you will need in retirement before they have viewed your entire financial landscape. A general misconception that tricks people is saying “you will need 80% of your pre-retirement income in retirement.” While this could end up being the case, and could very well be the average, we are all vastly different, and far from average. For something as personal as retirement, make sure the figures on your needs are just as personalized.
-Colin Feller, President