If you are like the majority of Americans, you have not thought about retirement savings. Even if you are in your 40s, studies show that you don’t want to think about retirement income planning. It is the rare 30 or 40 year old who is serious about funding the future. Over 75% of Americans who have a 401k plan available to them, do put money into it. They fund it, however, with only 6.5% of their wages. That is simply not enough.
Retirement planning, or any financial planning, is not something that we have been encouraged to talk about or think about. Luckily that cultural stance is beginning to shift as the Baby Boomers start to retire. Well over 50% of them are not financially secure. They are now beginning to get serious about 401k plans, IRAs and Roth IRAs. They qualify for the “catch up” provision within the 401k code, because they are over age 50 (well, there are a few Boomers still under age 50) which means they can pile an additional $5,500 on top of the $16,500 allowed yearly.
It does seem like age makes you realize that you should be socking money into your 401k. You know you don’t want to work forever and frankly, you know you can’t work forever. We are living longer and that means we need more money for our golden years. There is no reason that the average person can’t be working, at least part time, well into their 70s. But a part time income is only going to help somewhat.
You have to stop and really think about how much money you will need to live out the rest of your life. Experts say that your true income producing decades are 25-65. That’s 40 years of working, which seems like a lot if you are 25 and staring down the barrel of what feels like a lifetime of working. When you are, like me, at age 55, suddenly ten years isn’t much time! So, you need to find a way to enjoy these income producing years and plan for when they peter out. Here are my top three suggestions for you. They have helped me tremendously.
1. Get debt free. No kidding, when you don’t have to make a ton of credit card payments, you can save more money. Income, the income you make right now, is your biggest wealth producing asset. Why give it to other people? The additional benefit of no debt is you have better control over your monthly finances which means that income planning is easier. You will have set monthly expenses and you will not be a slave to interest charges.
2. Pay off your house. If you pay off your house early, there is that much more money that you have working for you instead of for the bank! Don’t be fooled by the idea that the tax savings is worth staying with a house payment. The numbers do not add up. The first few years, yes the interest you pay on the loan is at its highest, but by year 6, the benefit is all but gone. Better to have the money the monthly mortgage payment represents working for you in a mutual fund, earning an average of 8-10% annual return.
3. Decide what money means to you. What do you want to do with the rest of your life? If you want to golf everyday you will need a bigger nest egg than someone who wants to work part time and putter around the house. Do you want to travel? Help your kids pay for their kids’ college education? Volunteer to help at risk youth? All worth while plans and all will require that you have your monthly expenses covered. Maybe you need 3 million dollars invested to give you the income you want to live. Maybe you only need $500,000 invested. No one can tell you what you need but you.
Planning for how much income you will need during your golden years is not easy. There are going to be unforeseen expenses, medical treatments, prescriptions, plane trips. All of which will eat into your nest egg. If you have seriously addressed your needs and considered taking my humble advice about becoming debt free and mortgage free, these bumps in the road will be just that — bumps, instead of pitfalls.