To Retire Comfortably Save Regularly
It is estimated that a person needs 60 to 80 percent of his or her pre-retirement income to live comfortably in retirement. However, for the average worker, Social Security replaces only about 40 percent of pre-retirement income. The balance must come from pensions and personal savings.
If you haven’t already started, it’s important to start saving now. Your total savings are determined by the interest you earn on your savings and the time period over which you save. The sooner you start saving, the more money you will be able to amass over time.
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Bankrate follows a strict editorial policy, so you can trust that were putting your interests first. All of our content is authored by highly qualified professionals and edited by subject matter experts, who ensure everything we publish is objective, accurate and trustworthy.
Our reporters and editors focus on the points consumers care about most how to save for retirement, understanding the types of accounts, how to choose investments and more so you can feel confident when planning for your future.
Start Your Retirement Planning Today
Planning your retirement strategy is important but not something to stress over, especially if you start early. The same adage that applies to planting a tree, with the best time being 20 years ago and the second-best time being now, is relevant to investing.
If you need assistance with determining your ideal asset allocation, estimating when you can retire, or planning your retirement income strategy, you can seek the advice of a Certified Financial Planner or other qualified professional. The important thing is that you take retirement planning seriously and get started in earnest today.
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Which Retirement Plan Is Best For You
In many cases you simply wont have a choice of retirement plans. Youll have to take what your employer offers, whether thats a 401, a 403, a defined-benefit plan or something else. But you can supplement that with an IRA, which is available to anyone regardless of their employer.
Heres a comparison of the pros and cons of a few retirement plans.
What If You Come Up Short In Your Retirement Savings
You still have options. If youre able to wait to collect Social Security retirement benefits, you can increase your monthly benefit amount. Each month you delay collection, your eligible benefit increases, until you reach the maximum amount at age 70. See how your Social Security benefits change depending on when you start collecting.
You can also consider working after retirement. By earning money, you can rely less on your savings and you may be able to find a role that allows you to use your skills in a meaningful way. With more companies allowing remote or flexible work arrangements, you may find that working in retirement is a fulfilling way to spend some of your time while earning extra income to support your retirement lifestyle. Find out if working in retirement may be right for you.
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Retirement Planning Starts Today
Every Canadian should start saving for their retirement as soon as they can. Your money will never have as much growth potential as it does today, and the younger you start investing, the more earning potential youll have.
If retirement planning still feels elusive, you can always seek help from a certified financial planner. These financial experts can help you make retirement plans, hit savings goals, and possibly even help you manage your investments.
If youre ready to invest better, Motley Fool Stock Advisor Canada can help. You dont need a broker or a degree in Finance to grow your wealth. You just need a few minutes a month, and some great stock recommendations and thats what were here for. Best of all, when you join Stock Advisor Canada today, youll receive immediate access to our latest stock picks.
What To Consider When Planning For Retirement
Here are a few key questions to ask yourself as you think about a retirement plan:
- When do you want to retire? Are you planning to work until age 65 or until you are older than that? Do you have a goal of retiring early? How many more years you plan to spend in the workforce significantly affects how much money you are likely to need. If you choose to work until you are older, not only do your investments have more time to grow, but the number of retirement years you need to fund is slightly reduced.
- Where do you want to live? Are you going to stay in your current home or downsize? Do you want to stay in the same area or retire somewhere warm or closer to relatives? The cost of living in the area where you’d like to live as a senior citizen is another major factor impacting how much money you will need in retirement.
- How will you pay for your living expenses? Your Social Security retirement income isn’t likely to be enough to cover all of your expenses, so will you also have a pension? A 401? Will you need to save or invest money as well? Another factor to consider is the magnitude of your living expenses themselves. Whether you own or rent property in retirement can significantly change the amount of your living expenses.
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How Can You Start Saving For Retirement
When youve finally calculated how much youll need in retirement, youll typically have a moment of panic. Your ideal retirement number will often be in the hundred thousands, possibly millions , which is probably way higher than anything youve saved before.
While that number can be daunting, dont let it discourage you. The key is to save money over a long period of time, rather than all at once, and if you set your finances up right, saving money wont be a challenge. Here are some things you can do to set your retirement plan up for success.
Reap The Benefits Of Compound Interest
If youre itching to get started investing, great! If youre waiting until you have enough time or money, or for the stock market to cool down or heat up, stop that. Investing any amount of money is never a futile exercise, thanks to the magic of compound interest.
What is compound interest? It’s like a runaway snowball of money growing larger and larger as it rolls along. All you need to get it going is starter money.
As interest starts to accumulate on your initial investment, it is added to your ball of cash. You continue to earn interest, your balance expands in value and picks up speed and on and on it goes.
The sooner you get the snowball rolling, the better. Now lets go over how to make your pennies multiply.
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Retirement Savings Plan Basics
401 and 403 plans are two of the most prevalent employer-sponsored retirement savings plans. When you participate in a 401 or 403 plan, the income you will receive from the plan after you retire will be determined by:
- the money contributed to the account during the years you participate in the plan
- the way the money thats put into the plan is invested and
- the average annual return the investments provide.
Both 401s and 403s are what are known as salary deferral plans, which means a percentage of your earnings are contributed to an account in your name rather than being included in your take-home pay. When you participate in a traditional salary deferral plan, the taxable salary your employer reports to the IRS is reduced by the amount put into your accountand you do not have to pay any income tax on that money until you withdraw from your account, usually after you retire. Any earnings on your contributions are also tax-deferred while they remain in your account. This means your combined contributions and earnings can potentially compound at a faster rate, since all of your earnings get reinvested and no money is being taken out to pay taxes.
Roth Ira Investing Basics
By | Submitted On October 25, 2007
A Roth IRA is an Individual Retirement savings Account best known for providing tax free earnings growth and tax free retirement distributions. Individuals can contribute up to $4000 a year from after-tax dollars, and in return may receive tax free retirement income, provided all rules are met.
KEY POINT: In order to receive tax free retirement distributions:
1) you must be 59 1/2
2) your Roth IRA must be at least 5 years old.
Hint: A Roth IRA is not an advisable investment option if you plan to retire within the next 5 years.
Roth vs Traditional: What makes the Roth IRA different from a Traditional IRA?
KEY DIFFERENCES:
Roth IRA: Pay Taxes Now, Not Later:The Roth IRA is Tax-Exempt –meaning retirement income is tax free.
- Contributions come from After-Tax dollars
- Retirement Distributions are Not Taxed
- IRA Investment Earnings Grow Tax Free
- No required Distributions
- Has Income Restrictions
- No Age Restrictions
The Traditional IRA is Tax-Deferred = Pay taxes later
- Contributions come from Pre-Tax dollars
- Retirement Distributions are Taxed at a future Tax Rate
- IRA Investment Earnings Grow Tax Deferred
- Required to Take Distributions by age 701/2
- Has age restrictions
- No Income Restrictions
2007 Roth IRA Contributions
How Much Can I Contribute to my Roth IRA?
You can contribute up to 100% of your earned income or $4000 , whichever is less, MINUS any other IRA contributions you made thesame year.
2007 Income Limits
Establishing a Roth IRA
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Retirement Planning: The Basics
You might have an idealistic vision of retirement an idyllic time in the future when you can live your best life, with extra free time on your hands. But how are you pursuing that vision? Social Security might be around when you retire, but the benefit that you get from Uncle Sam might not provide enough income for your retirement years.
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But there’s good news: thanks to an abundance of new tools and resources, retirement planning is easier than it used to be. Here are some basic steps to get you started.
Determine Your Retirement Income Needs
It’s common to discuss desired annual retirement income as a percentage of your current income. Depending on who you’re consulting, that percentage could be anywhere from 60% to 90% or even more. The appeal of this approach lies in its simplicity. The problem, however, is that it doesn’t account for your specific situation. To determine your specific needs, estimate your annual retirement expenses.
Use your current expenses as a starting point but note that your expenses may change dramatically by the time you retire. If you’re nearing retirement, the gap between your current expenses and your retirement expenses may be small. If retirement is many years away, the gap may be significant, and projecting your future expenses may be more difficult.
How Much Should You Save?
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What Is Retirement Planning
Retirement planning is the process by which you prioritize your income and assets to support your ideal lifestyle once you stop working. Retirement planning involves devoting a portion of your paycheck to one or more retirement accounts, such as a 401 plan or an individual retirement account , which can be a traditional or a Roth IRA, among other forms.
Investing early helps you reap the benefits of compounding interest over time. You also need to take into account your risks at various stages of life as you decide how and where to save for retirement.
Be familiar with all the saving tools and strategies available to you, said Kevin Gaines, chief investment officer at American Financial Management Group. Using the best tool for a specific need may sound right, but you need to have some flexibility in case things change.
Retirement planning is an ongoing process, and what works for you now may change over time. Plan to reevaluate your cash flow needs every year and make adjustments to your retirement planning strategy. At some point, you may want to consider the assistance of a certified financial advisor.
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Understand Your Time Horizon
Your current age and expected retirement age create the initial groundwork of an effective retirement strategy. The longer the time from today to retirement, the higher the level of risk that your portfolio can withstand. If youre young and have 30-plus years until retirement, you should have the majority of your assets in riskier investments, such as stocks. There will be volatility, but stocks have historically outperformed other securities, such as bonds, over long time periods. The main word here is long, meaning at least more than 10 years.
Additionally, you need returns that outpace inflation so you can maintain your purchasing power during retirement. Inflation is like an acorn. It starts out small, but given enough time, can turn into a mighty oak tree, says Chris Hammond, a Savannah, Tenn., financial advisor and founder of RetirementPlanningMadeEasy.com.
Weve all heardand wantcompound growth on our money, Hammond adds. Well, inflation is like compound anti-growth, as it erodes the value of your money. A seemingly small inflation rate of 3% will erode the value of your savings by 50% over approximately 24 years. Doesnt seem like much each year, but given enough time, it has a huge impact.
You might not think that saving a few bucks here and there in your 20s means much, but the power of compounding will make it worth much more by the time you need it.
Registered Retirement Savings Plan
The Registered Retirement Savings Plan is a tax-sheltered savings account that houses certain investments. Basically, as long as youre earning income and youre under age 69, you can open an RRSP.
The tax benefits on RRSPs are remarkable. For one, any contributions you make into an RRSP grow tax-free. So, if the investments inside your RRSP perform well, you wont have to pay taxes on your earnings. Additionally, any RRSP contributions are automatically deducted from your taxable income, which can help you reduce how much you pay in taxes every year.
RRSPs do have some restrictions, however. For one, your annual contributions cannot exceed 18% of your previous years income, up to a maximum of $27,830. Any unused contribution space, however, will be rolled over to the next year.
Finally, you will pay taxes on RRSP withdrawals in retirement. Thats because your RRSP contributions are pre-tax, meaning money the CRA hasnt collected taxes on. When you start making withdrawals in retirement, the CRA will tax them as ordinary income.
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Enroll In Your Employers Retirement Plan
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Hsas Don’t Have Required Minimum Distributions
HSAs also stand out because they don’t have required minimum distributions like 401s do. These are mandatory annual withdrawals that everyone must take from all their retirement accounts, save Roth IRAs, beginning the year they turn 72.
It’s the government’s way of getting its cut of your retirement savings, but sometimes you may not want to withdraw that much from your retirement account. With an HSA, you won’t have to worry about mandatory withdrawals. You can leave your savings in your HSA as long as you’d like so it can continue to grow until you actually need it.
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How To Start Saving For Retirement
While starting early is always important even $25 a month in your 20s is helpful it’s OK to set money aside for more immediate needs first and then start tackling retirement in your late 30s and early 40s. However, you don’t want to wait much beyond that because you’ll need time to put money into a retirement account for that money to grow. The longer you wait the more you’ll have to sock away yearly making the challenge a lot more difficult.
How To Get Started
With some of these retirement plans , youll have access to the plan through your employer. So if your employer doesnt offer them, you really dont have that option at all. But if youre self-employed or earn any income, then you have options to set up a retirement plan for yourself.
First, youll need to determine what kind of account youll need. If youre not running a business, then your option is an IRA, but youll need to .
If you do have a business even a one-person shop then you have a few more options, and youll need to come up with the best alternative for your situation.
Then you can contact a financial institution to determine if they offer the kind of plan youre looking for. In the case of IRAs, almost all large financial institutions offer some form of IRA, and you can quickly set up an account at one of the major online brokerages.
In the case of self-employed plans, you may have to look a little more, since not all brokers have every type of plan, but high-quality brokers offer them and often charge no fee to establish one.
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