Seven Steps to Improving Your 401(k) Balance: Plan today for a better tomorrow!in Planning for Retirement
When it comes to retirement planning, remember the line from Alice in Wonderland – “If you don’t know where you’re going, any road will take you there.” You’ll eventually get to your end point, but for the best results, travel towards your retirement with an effective road map!
Determine how much you need to save to live the retirement you want. Look at it in today’s dollars. Many models will say you need to save 70%-80% of your pre-retirement income, but that is not right for everyone. For the sake of making it easy, look at it in monthly dollars (multiply by 12 to get your annual need) then look at any annual expenses such as home owners insurance, car insurance, etc. to get your income need. Make sure to factor in any hobbies, travel, and certainly health care costs. Once completed, make sure you are accounting for inflation when calculating your income need in retirement. $1,000/month will not buy you in 2037 what it will buy you in 2017. Generally, we use historical inflationary numbers to calculate those numbers. Historically, inflation has averaged 2.8%-3.1% per year, but it is currently slightly lower.
What are your known sources of income going to be in retirement? Will you have a pension? How about social security? I generally recommend getting the updated calculations for these two items annually so you can evaluate your plan. Your company can generally provide you with your pension information and you can get your updated social security information from www.ssa.gov.
Subtract your known income sources from step two from your income need in step one, and this will get you your number. Do you have more income than expenses? Congratulations! For most people there will be a shortage. Now what?
Multiply your shortage amount from step three by 12 to get your annual income need. For instance: Income needed is $5,500/month – social security and pension of $4,250 would leave you with a shortage of $1,250/month x 12 = $15,000 in additional income needed. How much do you need to save to provide $15,000/year in income?
Determine how much you need to save. Experts differ on what percentage of your money you can withdraw annually without depleting your funds. Much of that really depends on how you invest your savings and what type of risk you are willing to take. To fully understand this you have to consider inflation (currently at around 2.2% and historically at roughly 3%) and market risk among other things. I generally recommend calculating based on a 4% distribution rate and investing in a diversified portfolio, but every case is slightly different. For this example let’s use a 4% distribution rate. Income need annually = $15,000 divided by distribution rate of 4% = $375,000 needed to provide that income level. Are we done? Not just yet.
Do you have any large purchases that may be part of your retirement plan? Perhaps a boat, vacation home, etc.? Make sure you add that cost to the amount you need to save.
How much do you need to save per pay period, or annually, to hit that number? There are many planning software tools available to help you calculate that need. Is it 5% contribution per year or 10%? Know your number and it can make your planning so much easier and reduce your stress level immensely!
By following these seven steps and planning as early as possible, you’ll be well prepared for retirement!
To schedule a free, no obligation appointment with Lafayette Federal’s CFS* Financial Advisor, visit www.lfcu.org/investment.
*Non-deposit investment products and services are offered through CUSO Financial Services, L.P. (“CFS”), a registered broker-dealer (Member FINRA/SIPC) and SEC Registered Investment Advisor. Products offered through CFS: are not NCUA/NCUSIF or otherwise federally insured, are not guarantees or obligations of the credit union, and may involve investment risk including possible loss of principal. Investment Representatives are registered through CFS. The credit union has contracted with CFS to make non-deposit investment products and services available to credit union members.