When you think about your first day of retirement, what do you see? Are you relaxed and energized, thinking about all the wonderful new possibilities ahead?
LET’S EXPLORE THE POSSIBILITIES!
Retirement: A New Beginning
Today’s retirees are living longer than ever before – well into their 70s, 80s, 90s, and even 100s – and are pursuing diverse and active lifestyles. They volunteer, travel, exercise, help care for grandchildren and other family members, and even continue to work, ideally on their own terms. Retirement is no longer viewed as a time of rest after years of hard work, but the beginning of a brand new stage of life, complete with new adventures. How will you create yours?
Before you answer, consider this:
Most people will probably need between 70% and 100% of their final income each year during retirement to afford a Comfortable lifestyle.
But there’s a catch:
Your income needs to increase a bit each year to keep up with the rising cost of living. For example, if you retire making $60,000 and decide that you’ll need 80% of that amount to live on, you’ll need a little more than $48,000 in your first of year of retirement (including any income you would receive from Social Security). Then each year after that, your retirement income will need to rise to maintain your lifestyle. That means you’ll need a sizable amount of money set aside before you retire in order to provide the income you’ll need during retirement.
There’s good news:
Your employer offers one of the most valuable employee benefits available today – a defined contribution retirement savings plan. By taking full advantage of your employer’s plan, you can help make your retirement the best stage of your life.
Retirement: Your Retirement Income Strategy
In our parents' and grandparents' era, retirement income was built from what was often referred to as the "three-legged stool." One leg was Social Security; the second leg was an employer benefit known as a pension plan; and the third was an individual's own personal saving.
Unfortunately, traditional pension plans are rare nowadays — only a small percentage of firms offer one — and Social Security has become the source of much debate (see sidebar). Tomorrow’s retirees will likely need to piece together their income from a variety of sources, which might include the traditional legs mentioned above, as well as other sources of income, such as real estate and art, insurance and annuities, and perhaps even income from a part-time job or a new business venture.
And fortunately for you, a potentially strong source of retirement income could be your employer-sponsored retirement savings plan. By taking full advantage of your plan now, you could make it the core piece of your retirement income strategy
down the road.
How Much Will You Receive From Social Security?
Social Security has been the subject of much debate in recent years. While some folks hope to rely on Social Security for all of their retirement income, others question whether Social Security will help much at all. For most people, the reality probably falls somewhere in the middle. To get an estimate of your Social Security benefits, visit https://www.ssa.gov.
What Does It Take to Provide Income for a Retirement That Lasts 25 years?
This table offers a glimpse of how much it might take to provide 70% of a given salary each year for 25 years, using certain assumptions, including the fact that your salary will rise by 3% a year until you retire. These amounts do not consider any current savings you may have, or other possible income sources such as Social Security. They are meant to show how important it is to plan ahead. To see how these figures might compare to your own savings target, use a goal-setting worksheet or an online retirement goal-setting calculator, or visit a financial professional.
Benefits for Today and Tomorrow. Your retirement savings plan offers three primary benefits, including convenience, tax advantages, and a variety of investments to consider.
When you participate in an employer sponsored savings plan, your contributions are taken directly from your paycheck. This process makes saving easy, allowing you to “pay yourself first,” automatically, each pay period. In addition, some employers offer an employer match — extra money that goes into your plan based on how much you contribute. If your plan offers a match, be sure to save at least enough to get the full amount. The money is similar to a guaranteed return on your contribution dollars.*
Depending on the type of plan your employer offers, you could cut your tax bill both now and in the future. With a traditional “pre-tax” savings plan, contributions are deducted from your pay before income taxes. That means your taxable income — and the amount you pay to Uncle Sam each year you participate in the plan — is lower. In addition, your account benefits from “tax deferral.” Unlike other investment accounts that require you to pay taxes each year on the earnings, retirement savings plans allow you to put off paying taxes on your earnings until you withdraw the money. Some plans also offer a Roth account. With Roth accounts, your contributions are taken from your pay after taxes, but withdrawals are tax free if certain requirements are met.**
*Employer matches are often subject to a vesting schedule, which means you need to be employed for a certain amount of time before the match money, and any earnings on it, is entirely yours.
**Withdrawals from non-Roth plans and non-qualified withdrawals from Roth plans will be taxed at then current rates. In addition, early withdrawals will be subject to a 10% penalty tax. See your Summary Plan Description for more details.
Your plan offers many different types of investments. This will help you put together a strategy to pursue your saving goals with a comfortable level of risk (see Investing 101 for more information).
Once you've made the decision to set aside money for retirement, the next important decision you'll make is how to invest that money. That decision really boils down to understanding a few simple concepts and how they relate to your individual circumstances.
First, let's consider some basic principles of investing. The investment options available in your plan may range from not so risky ("conservative") to very risky ("aggressive"). Riskier investments typically offer the chance for higher returns over the long term — but they also come with a greater chance of losing your savings.
Using a mix of different investments, a process known as "diversification," can help you manage risk in your portfolio.
The investments in your plan can generally be placed in one of three categories called "asset classes." They are stocks, bonds, and cash (also known as capital preservation). Each asset class has a different risk/return personality.
Higher Risk, Higher Potential Reward
Stocks represent ownership in a company — i.e., when you own stock in an organization, you actually own a small piece of that company. The number of shares you own determines how much of the company you own. Stocks are the most risky of the three asset classes, and therefore tend to offer the best potential for higher returns over time. But they also may present the greatest risk to your money.
Moderate Risk, Moderate Potential Reward
Bonds represent loans you (the bondholder) make to a company or a government (the borrower). In return for the money you provide, the borrower promises to pay interest income at a stated rate. However, there are no guarantees that the borrower will continue to make its promised payments or that you will get the full value of your loan back. For this reason, bonds fall in the mid-range of the risk/return scale.
Lower Risk, Lower Potential Reward
These investments are designed to protect your money. Although they are considered low risk in the sense that there is a small chance of losing your investment dollars, there is a larger risk that your money won’t grow enough to adequately pursue your savings goal.
Most retirement savings plans offer access to the three asset classes through mutual funds. These investments bring together the money from many different retirement plan participants to buy a pool, or “portfolio,” of individual stocks, bonds, and/or cash investments. By investing in a fund or several funds, you own small portions of each individual security. You are also taking advantage of the principle of diversification, which helps you manage risk. You select funds for your needs based on each fund’s objective (what it is designed to achieve).
Following are some common fund objectives:
Growth: Growth of investment dollars over time (can be more or less aggressive). They mainly invest in Stocks and tend to offer higher long-term average returns, but carry most risk of loss.
Income: Provides a stream of income over time. They mainly invest in Bonds and generally fall in the middle of the risk/return spectrum.
Capital Preservation: Protects investment dollars. They mainly invest in Cash investments and low-risk bonds and are the
Most conservative offerings in the plan; they also tend to offer lowest returns.
Something to Consider
Before investing in a mutual fund, carefully consider its investment objectives, risks, fees, and expenses, which can be found in the prospectus available from the fund. Obtain a copy of the prospectus and read it carefully before investing.
When you choose investments for your retirement savings plan, you use a process called “asset allocation,” which refers to how you divide your investment dollars among the three main asset classes. But how do you make your choices?
Three main factors that will help guide your asset allocation decision:
Savings goal: How much you want to have in your retirement savings plan account at retirement
Time horizon: How long until you retire
Risk tolerance: How much risk you are willing to take with your savings to pursue returns
Generally speaking, a large goal, a high tolerance for risk, and a long time horizon would translate into a more aggressive strategy — and a higher allocation to stock/growth investments. The opposite is also true: smaller goals, a low tolerance for risk, and a shorter time horizon might require a more conservative approach.
A careful analysis of these three personal factors can help you make thoughtful, strategic choices for your retirement savings plan. Consider working with a financial professional.
Also keep in mind that there is no guarantee that any investment strategy will be successful; all investing involves risk, including the possible loss of principal. And remember that asset allocation and diversification can’t guarantee a profit or eliminate the possibility of potential losses, including the loss of principal.
Age 50 and Over: Here's a Chance to Catch Up!
If you are age 50 or over and are just now beginning to plan for retirement, don’t panic. Special Internal Revenue Service (IRS) “catch up” rules allow you to save more in your retirement savings plan. While most workers can contribute up to $18,500 in 2018, savers age 50 and older can save up to $24,500 in 2018. The IRS reviews these figures each year for possible adjustments.
Plan now for your retirement. No matter what your age, now is the time to begin planning for retirement. And an important first step is participating in your employer sponsored retirement savings plan.
Contribute as much as you can (up to plan limits) to benefit from any employer match, as well as current and future tax advantages.
Invest thoughtfully and strategically, based on your savings goal, time horizon, and risk tolerance.
Review your plan at least annually to ensure Plan now for your retirement.
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