In a perfect world, those planning to retire would have adequate money saved up for any and all future expenses. Retirement savings is an important part of life, and failing to fund the future is a serious misstep. In the United States, the average retirement account is far less than it should be for a comfortable financial future. Addressing the needs you will expect once you retire and how you will be able to afford those needs is part of the retirement planning process.
A financial “safety net” is something we should all strive for as we begin the retirement funding process. By understanding what kinds of expenses we may face, we can begin to implement an investment strategy that works to ensure a comfortable retirement free of financial stress.
It’s Never Too Early to Start
The retirement financial safety net begins to take shape the minute you establish a retirement savings account. The younger you start, the better your chances of having a stable, comfortable retirement. Financial planners the world over know that getting started on retirement planning as soon as you can is the key. Fresh out of college and embarking on your first “career” job? Set up a retirement plan. Start saving now to take advantage of compounding interest in retirement plans like mutual funds and employer-sponsored plans. Think about this: over a 40-year career, if you fund your retirement accounts to the maximum allowed by law every year, you could easily retire a multi-millionaire! If you wait until you’re older, you won’t have nearly as long to set aside money for retirement.
Take Advantage of Employer-Sponsored Plans
Many employers offer retirement savings plans like 401(k) or 403(b) accounts for employees. In most cases, employers match the contributions that employees make to these plans; for example, employers may contribute dollar for dollar to a plan as the employee funds it during the year.
This matching employer contribution can be HUGE. It’s basically free money, and can quickly accelerate the savings you are putting toward your retirement. Financial professionals across the industry encourage employees to take full advantage of these plans as soon as they are available by making the maximum contribution possible. Contributions can be made month by month, usually through a payroll deduction, or at the end of the year. By taking advantage of that employer contribution, you will see your retirement savings grow quickly!
Think About Future Expenses
Getting started on funding your retirement obviously makes great financial success. The earlier you begin, the more opportunity you have to take advantage of tax breaks, employer contributions, and compounding interest.
While you are saving money and setting aside funds for your retirement, it is critical to have a good understanding of your future expenses. What will you need to spend during retirement, and how can you budget for those expenses? This part of the planning process is so important because it gives savers a solid picture of financial needs, both now and in the future. With a budget in mind and a clear understanding of the expenses one might face during retirement, it is possible to establish savings goals.
Here are some of the expense categories you should keep in mind when planning for retirement:
- Household supplies
- Entertainment expenses (cable, the Internet)
- Home furnishings
- Maid and yard services
- Mortgage payments (many retirees have paid off their homes by this point, but if you have not, monthly payments are part of the picture)
- Property taxes
- Homeowners insurance
- Homeowners association fees
- Utility expenses (water, sewer, gas, electric)
- Repair and maintenance expenses
- Pest control
- Entertainment (movies, theater, concerts)
- Restaurant dining
- Clothing and shoe purchases
- Hair styling and salon visits
- Car purchases
- Car repair and maintenance expenses
- Motor vehicle insurance and registration costs
Medical and Dental Expenses
- Healthcare insurance premiums
- Out-of-pocket costs for medical and dental procedures not covered by insurance
- Medications not covered by insurance or those requiring co-pays
- Over the counter medications and dental products
- Home computer and phone purchases, including repair
- Magazine subscriptions
- Club membership fees
- Vacation expenses
- Donations to charities
- Church donations
- Life insurance premiums
- Tax preparation costs
- Vacation expenses
As you can see, there are several categories and a LOT of different expenses you may face. Of these categories, medical and dental expenses tend to be one of the most overlooked areas. People planning for retirement often skip these expenses or do not have a full understanding of them. Medicare benefits cover a lot of healthcare expenses but do not cover things like long-term care, dental procedures, or prescription drugs. Supplemental insurance is something retirees should consider to make sure their expenses are covered adequately.
Don’t Forget that Things May Change
Great, you’ve done your homework and have started down the path to a stable financial future. You’re ahead of the game; the average American starts too late and contributes too little to retirement plans, putting stress on government support programs like Social Security and Medicare.
One critical aspect to remember as you do your retirement planning and your retirement saving, though, is that THINGS CHANGE. You must remain flexible, as you simply do not know what may happen in the future. A dramatic downturn in the stock market could erase some of the assets you worked so hard for. An unforeseen medical expense could drain your retirement accounts quickly. Even changes in federal legislation can greatly impact your retirement savings and your financial comfort level. Expect the unexpected, and try to minimize surprises by diversifying your retirement accounts.
What does diversifying mean? In simple terms, it means not putting all of your retirement savings into one basket. Spread your savings around, including in IRAs, employer-sponsored plans, stocks and bonds, real estate, and other financial assets. You’ll be able to weather any market downturns and future depreciation this way.
As with any financial plan, talking to a professional can help. A retirement planning expert or certified financial planner can help you determine what strategies work best for your retirement needs and retirement goals.