Retirement Planning

Situation

My husband and I are in our early-30s, own a home and have some savings. We have tried to be diligent about our finances and want to get serious about planning for our retirement even though it is decades away. What steps should we consider to make sure we have enough funds to retire in our 60s or perhaps even a little earlier?

Suggestion

It sounds like you are on your way to a financially secure future. Congratulations!

Accumulating the funds you will need for a financially secure retirement can be difficult. Even though your living expenses during retirement may only be 70% to 80% of those before retiring, you will not have your normal paycheck and your Social Security benefits will probably not be large enough to let you live the lifestyle you want.

The actual amount you will need depends on your anticipated expenses, the level of Social Security benefits, your tax situation, the earnings rate on your savings and your goals about leaving money to heirs. It can get pretty complicated, but the bottom line is that you will probably need and want a large retirement nest-egg. The best ways to have those funds are to take advantage of employer provided retirement plans and other options while you are still working.

Employer sponsored plans

If your employer offers a 401(k) plan or some other form of retirement plan, be sure to participate. The funds you accumulate in that plan can be a large source, if not the major source, of your retirement income. In addition, these plans have benefits to make the process easier and more effective. They are convenient, the employer will probably add to your contributions, the earnings are tax deferred and many plans provide investment flexibility. Here are some ideas to help you maximize the benefits of your plan:

1. Participate in the plan. As simple as this sounds, some studies have found that many choose not to participate. Even minimal participation makes sense.
2. Contribute as much as you can. Your plan may have limits on the portion of your wages you may contribute. For 401(k) plans, the annual limit for employee contributions is $18,500 for 2018. In addition, a catch-up provision was added that enables participants age 50 or higher to make an additional contribution (up to $6,000 for 2018). Determine what you can afford each year and make the largest contribution you can.
3. Get the entire employer's match. Review your plan to understand how the employer's contributions are made and allocated. Your Human Resources department should be able to help you.
4. Use a sensible investment strategy. Choose a combination of investment options that match your time horizon and risk tolerance. Generally, longer time horizons and greater risk tolerance dictate a more aggressive investment strategy with greater use of equity investment choices.

Other retirement planning options

Funds from your retirement plan and your Social Security benefits can provide a great deal or all of your needs, but there are other options you may want to consider.

1. Traditional IRAs. Making annual contributions to an IRA can add up significantly, especially if you start early. The contribution limit for 2018 is $5,500. In addition you can contribute an extra $1,000 if you are age 50 or over There are rules about eligibility and tax deductibility to consider, but do not ignore this powerful tool.
2. Roth IRAs. This planning tool offers many of the benefits of traditional IRAs, but the extra benefit of distributions never being subject to income tax. As with traditional IRAs, there are eligibility rules to consider and it may be advisable to consult with a tax or retirement planning professional to get a complete understanding of the rules.
3. Other savings. IRAs offer tax benefits that make them ideal for accumulating funds, but saving and investing in a regular account still makes sense. Consider some form of automatic savings plan that moves funds from your checking account into a "special" account every month. This forced discipline makes it easier to develop the savings habit.