Most people understand that the future is uncertain. In most of our lives, we realize that preparing for the future is simply part of our existence. Retirement planning is a critical part of that overall preparedness process; setting aside funds for future expenses is a smart way to ensure security long after we are no longer drawing a paycheck.
Perhaps you’ve saved money for retirement, establishing retirement accounts and setting aside funds for future use. But are you really prepared? The financial landscape has changed dramatically over the past several years, and federal tax reforms passed in 2017 have caused an upheaval in many people’s plans. In this article, we’ll discuss the role of retirement preparedness plans, taking into account many of the aspects that will help you make informed decisions about your financial future.
The State of Retirement Savings
While many of us have set aside money for future expenses, the unfortunate fact is that the average American has not adequately prepared for retirement. On average, Americans have only saved about $84,500 for retirement, far short of the figures recommended by retirement planning professionals. The old adage that one should save at least $1 million over the course of a career for retirement purposes may not be accurate, but the figure is close to recommended levels.
In a survey conducted by a leading financial research organization, it was found that about 21% of survey respondents in the U.S. had not saved any money for retirement. 33% of respondents to the survey indicated that they only had, on average, about $5000 in retirement savings. Questioned about these savings shortfalls, many suggested that they were depending on government benefits such as Social Security to cover future expenses. Here’s the problem with that scenario: the average monthly payout of Social Security benefits totals $2500, which is considered an insufficient level for most people. In many cases, the Social Security benefit is even less, pointing to an onslaught of people woefully unprepared for life after their careers are over.
It is clear that retirement preparedness is key to overcoming shortfalls in retirement savings, but where should one begin? In the next section, we’ll talk about retirement calculators and how they can help create a roadmap for the planning process.
Retirement Savings Calculators
Are you ready for retirement? One useful tool for those interested in creating a solid financial future is that of the retirement calculator. There are many such tools available, but one of the leading calculators is the series created by the Indexed Annuity Leadership Council (IALC). These customizable calculators can help provide a full picture, setting the stage for a comfortable and secure retirement. With the calculators, users can pinpoint retirement planning aspects like:
- Long-term savings
- Tax options and how they affect savings
- Risk tolerance
- Projected Social Security benefits
- Tax advantages of annuities vs. savings accounts
The online calculators are powerful and insightful; with them, a user can estimate retirement living expenses, including housing, medical costs, long-term care, and many more potential financial burdens after quitting one’s job. Think of online calculators as one step towards creating a solid retirement preparedness plan; they complement the professional guidance of a certified retirement planner, and can pinpoint potential shortfalls that should be addressed as one nears retirement age.
Tax Reform and Retirement
Phase one of the Trump administration’s vaunted tax reform has already helped to stimulate the economy, creating new wealth for individuals, small businesses, and large corporations alike. In phase two of the reform, thought to begin at some point in the summer of 2018, a number of federal lawmakers have indicated that they will propose an overhaul of the tax code in regard to retirement savings. Under current regulations, there are significant barriers to personal savings by taxing these funds in different ways.
The proposed changes will eliminate “savings bias” in the tax code, streamlining the taxation process and allowing more funds to remain in tax-advantaged accounts. Retirement plans offer flexibility to those planning for retirement, but each of the current types have their own deduction limits, contribution limits, and regulations governing contributions and required withdrawals from the accounts. Some financial analysts and lawmakers agree that the concept of universal savings accounts are a great way to ease retirement savings restrictions that may prevent individuals from saving adequate funds for the future. Universal savings accounts act much like a 401(k), with similar benefits, but can be opened regardless of employment status, can be transferred between jobs, and can be used for nearly any financial purpose.
President Trump also recently signed an Executive Order directing the U.S. Departments of the Treasury and Labor to review possible changes to the current retirement savings rules. The goal of the Order is to expand access to workplace-based retirement plans, reducing plan administration costs, and allow those with retirement accounts to forgo required minimum distributions, keeping more money in the accounts where they can accrue value.
Diversifying the Retirement Portfolio
Even if you believe you’re prepared for retirement, it is always a good idea to examine your preparations on an annual basis. Using retirement savings calculators, as discussed above, pinpoint potential weak areas of the savings plan. The periodic plan review can also help identify new opportunities for saving and expanding the retirement portfolio. Adding diversity through multiple savings options is another way to minimize the risks associated with investment and to help maximize the gains possible with smart retirement investment strategies.
An option to consider when adding to the retirement portfolio is that of the fixed indexed annuity (FIA). This option is issued by an insurer and is tied to a benchmark stock market index like the S&P 500 or NASDAQ rather than being influenced by an interest rate. It provides a steady and reliable source of income after retirement, and the tax advantage is substantial. Tax-deferred growth is a hallmark of the FIA, and taxes are only paid after withdrawals are made.
There’s no better time to start than today.
Retirement savings is a long-term strategy. It is never too early to begin planning for your retirement future. With savings calculators, portfolio diversification, and with the guidance of a qualified retirement planning professional, you can help to ensure that you will have enough money saved for expenses long after you’ve retired. Having a flexible and comprehensive retirement savings plan can create the foundation for a comfortable, secure, and successful retirement for you and for your loved ones.