Many of the most common questions that I get from young, married couples concern how to save for retirement. Saving for retirement, like getting married, seems like an adult thing to do. Our elders have told us to start saving sooner rather than later, but they haven’t mentioned many of the practical aspects of how to begin. How much do I need to save? What’s the best way to save? Are there specific companies I should use?
The lack of direction often leads to paralysis or haphazard investing decisions. In a recent GoBankingRates survey, the site found that one third of Americans report that they have $0 saved for retirement. Additionally, another 23% have less than $10,000 saved. That’s 56% of Americans having less than $10,000 saved for retirement. That just won’t cut it.
Whether you’re in your 20s, 30s or beyond, making a plan for your retirement will become one of the most important financial moves that you make. Today, I want to get back to the basics and give you some practical steps to start planning for your retirement. When it comes to creating your plan, you should consider the following five essential questions.
What Do You Want?
Most people’s initial question to me is how much money should I save or should I have saved at this point. That’s an impossible question for me to answer without knowing what you want in your retirement. Do you want to live the same lifestyle you have now? Do you want to take road trips? Do you want to start your own side business?
Your initial step in your planning should involve thinking about and writing down what you imagine for yourself. You can even take it a step further and have different goals:
- Maintaining your current standard of living
- Maintaining your current standard of living with a few perks
- Funding your fantasy retirement.
Don’t limit yourself here. Discover what really drives and appeals to you and take away any judgment of whether it’s feasible. You might find that your ideal retirement is closer than you think.
What Do You Have?
Next take an inventory of what you have. This step often makes people uneasy because facing where they are causes feelings of inadequacy. But you have to know where you are to know where you’re going and how you will get there. And as you refrained from judging your retirement dreams, use the same uncritical lens when discovering where you are.
Start with a quick personal balance sheet. What are your assets? What are your liabilities? Your assets include things like a house, car, bank accounts, current retirement accounts, etc. Your liabilities are debt like your mortgage, student loans, credit cards, etc. You calculate your net worth by subtracting your liabilities from your assets.
You will also need to perform this analysis with your income and expenses. It’s essential to know what is coming in and what’s going out to see what you have to work with as far as creating your plan.
How Much Will it Cost?
Now that you’ve figured out what you want and what you have to work with, you can start thinking about how much it will cost you to get to your goal. The easiest way to begin this process is looking at what it costs you to live now, based on the income and expense analysis that you just did. You can then use an inflation calculator to see what those costs will grow to and estimate what additional costs you may have or may be able to get rid of before you retirement.
For example, your health care costs are likely to be higher. You may also want to increase your budget for travel. Alternatively, maybe your costs will go down substantially because at that point you will have paid off your mortgage. Having a detailed list of expenses allows you to manipulate the figures as you see fit.
You can also use an online calculator such as the one on Bankrate or CNN Money and base your projections on the amount that you need on your household income. A common starting point is 70 to 90% of your gross income. However, having more general numbers like this make it a little harder to adjust specific expenses that may increase or decrease at that time.
Can We Get There?
The three prior steps have built the foundation of your plan. You know what you want, you know what you have, and you know how much it will costs you to get to where you want to be. Do these three pieces fit together? In other words, can you actually get to where you want to be based on your current situation?
You can again use an online calculator, like the ones I mentioned above, to see if you can actually get to where you want to be based on your current savings rate and anticipated rate of return.
If you’re not going to make it, you will now have to wrestle with either adjusting your current circumstances (e.g, save more, cut your current expenses) or changing your goals to fit your current situation. I’m a big believer in having balance in your life. So I wouldn’t suggest living miserably for 30 years just so you can have your fantasy retirement. In addition, I wouldn’t suggest living only in the now in the hopes of merely surviving in retirement. The actual balance is different for everyone and only you can decide what is most important to you.
Where Do We Invest
The last step is determining where to invest your money now that you have a plan in place. If you haven’t read my previous posts about investing take some time to learn the fundamentals of that process before you get started. In short, investing comes down to three essential keys – controlling costs, having the right asset allocation, and diversifying your investments to hedge against unnecessary risks. Investing in diversified index funds can help you easily accomplish all of these steps in one investment.
As far as vehicles to invest in, couples have the distinct advantage of getting to pick and choose the best ones based on the options available to two people rather than one. Start with looking at your workplace retirement accounts – 401k, 403B, 457 plans. Your employer may match your contributions, which will automatically give you the highest rate of return on your money. Keep an eye out, though, for those plans that may be costly or not give you good places to invest.
Next you can look individual retirement arrangements (IRAs). You can set up your own IRA through discount brokers like Fidelity or Vanguard. These vehicles often give you more options when choosing your investments and allow you to contribute up to $5,500 in each account. They also offer flexibility in with spouses that don’t work, as well as pre- and post-tax options. The self-employed also have additional options with solo 401ks and SEP IRAs.
Parting Words of Encouragement
I know this may seem like a lot of information already. So I want to offer a few words of encouragement when it comes the creation of your retirement plan. Remember that creating a plan is a process. You should take time to do each of these steps and sit with them for a little while. Trying to do everything at once will only overwhelm you and likely cause you to burn out.
In addition, your goals, desires, and circumstances will undoubtedly change as time goes on. The great thing about having a plan and knowing your target is your ability to adjust as time goes on.
Overall, creating a plan can be a fun but intimidating process. But taking this step and getting started will be one of the best decisions you’ve ever made.