Happy "National Save for Retirement Week"! Retirement has become such a hot issue, that the Senate passed a Resolution "with the goal of increasing the retirement savings and personal financial literacy of all people in the United States." To help further the Senate's cause, here are the steps you need to take to get your retirement plan on track.
What are the core components to every retirement plan?
1. Determine how much money you spend. Whether you use a software program (Quicken), an app (Mint.com), a spreadsheet or an old-fashioned legal pad, it's nearly impossible to build a retirement plan without determining how much money is coming in and going out these days.
2. Pay down outstanding consumer debt. This includes credit cards, auto loans, etc., but not mortgage debt.
3. Establish an emergency cash (or cash equivalent) reserve fund of 6-12 months of expenses (1-2 years if you are in, or within two years, of retirement).
4. Crunch your retirement numbers: use an online retirement calculator like EBRI's Choose to Save Ballpark E$timate to determine where you currently stand. To be conservative, use 4 to 4.5 percent for an inflation assumption; for rate of investment return, use 4-6 percent; for life expectancy, use 95 if you are younger than 50, and use 90 if you are over 50 (for a more precise estimate, go to www.livingto100.com and use their Life Expectancy Calculator.) You can also go to the Social Security estimator to review your future benefit.
With those steps completed, let's break down the next steps by age.
5. Under 25: About two-thirds of those who earned bachelor's degrees last year graduated with student loan debt and of those, the average amount of debt is about $26,500. With that burden, combined with a tough job market, it's hard to help young workers focus on retirement. If you are fortunate enough to have a job, now is the time to begin the habit of saving for retirement. The goal is to contribute an amount that will allow you to qualify for your employer's match into its retirement plan. For many, this will be 6 percent of salary.
6. Ages 25-40: Those college years are fading fast and now its time to increase retirement contributions to at least 10 percent of income. There will always be competing goals during these years, like saving for a house down payment or putting away college money for your own kids, but these should occur after your own retirement contribution or simultaneously, if you can afford to do so. Securing your own financial future is paramount in these years.
7. Ages 40-55: Hopefully, you are entering your prime earning years, which means that your retirement contributions should be increasing to 15 percent or more. The contribution limit for 401 (k) plans will increase by $500 to $17,500 next year and if you are 50 or over, the catch-up contribution level is $5,500.
8. 55-70: Retirement is just around the corner, so you may need to begin adjusting your asset allocation to reduce risk. The sooner you need your money, the less risk you should be taking. You may also need to consider purchasing long term care insurance to protect your retirement assets.
9. Over 70: It's time to reap the benefits of all that hard work! In addition to the stream of income from Social Security or pension, you will begin tapping your retirement funds. How much can you safely withdraw from your portfolio without draining it too soon? This is called the withdrawal rate and it generally should be no more than 4 percent of your total portfolio value, not including your emergency reserve fund. Four percent is not a hard and fast rule: if you are retiring earlier than age 65, use a 3.5 percent rate. That means if your retirement funds total $500,000, you could safely withdraw $20,000 to supplement your other streams of income.
Once you reach age 70 1/2, IRS rules require you to withdraw at least a certain minimum amount from your Traditional IRAs and workplace retirement plans each year. This is referred to as your required minimum distribution (RMD). You can calculate the RMD with a calculator like this one from FINRA or you can ask you CPA or investment advisor to guide you.
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