The retirement years are often seen as a time when people finally let go of their careers and do the things they’ve always wanted. If you’re constantly worrying about your finances, enjoying one of the most carefree times in your life is hard.
37% of workers are concerned about outliving their retirement savings, according to the latest Transamerica Center for Retirement Studies survey. To be better prepared, follow these steps.
Make sure you know how much you’ll need.
Having a good idea of how much you’ll need for retirement makes planning easier. As retirement expenses vary from person to person, there is no ideal amount to save for retirement. Nevertheless, you can at least start by following some general rules.
There is the “80% rule,” according to which you should try to maintain your current lifestyle in retirement with 80% of your pre-retirement income. For example, if you’re currently earning $100,000 a year, your retirement should provide you with $80,000.
As soon as you’ve determined how much income you’ll need annually, apply the “4% rule, where retirees are allowed to withdraw 4% of their savings annually for 30 years without worrying about outliving them. If you multiply the amount you need each year by 25, you’ll arrive at your “ideal” retirement savings amount. Your savings goal will be $2 million if your annual plan is $80,000.
Inflation should also be taken into account when implementing the 4% rule. Your first-year withdrawal should be 4%; subsequent withdrawals should be adjusted based on inflation for the following year.
Don’t forget to adjust your 401(k) contributions.
In addition to helping you save and invest for retirement, 401(k) plans also lower your taxable income. You should contribute the minimum amount if your employer matches your 401(k) contribution.
It is not feasible for everyone to max out their 401(k), but a good rule is to increase your contributions annually. Even small increases like 1% can make a big difference with compound interest. As you near retirement, get aggressive about taking advantage of the catch-up contribution allowed.
Multiple retirement accounts are a good idea.
To prepare financially for retirement, you should approach it from various angles. In addition to 401(k) payouts and Social Security, retirement accounts like IRAs can be excellent sources of additional retirement income. Retirees with Traditional IRA contributions can deduct all or part of their contributions depending on their income, employer’s retirement plan coverage, and filing status. The RMDs for traditional IRAs begin at 72, just like they do for 401(k)s. Roth IRAs do not require RMDs and can be withdrawn tax-free.
Traditional and Roth IRAs each allow a maximum contribution of $6,000 ($7,000 if you’re 50 or older). Your choice of account is usually influenced by your current tax bracket and your projected tax bracket. If you’re younger, a Roth IRA can be beneficial since you can pay taxes on the front end while in a lower tax bracket and let the money grow and compound tax-free. It’s a good idea to consider a traditional IRA if you’re in the prime of your career and likely in the highest tax bracket since your contributions may be deductible.