Planning for retirement has changed a lot in the last 20 years. There used to be the analogy of a three legged stool. There was a company pension, Social Security benefits, and your personal savings. As an employee, you weren’t responsible for choosing the investments in the pension. As long as you stayed in the job long enough, you were eligible for the monthly check.
Fast forward to today. Few people have pensions. Some employees have access to a 401(k) plan, but they are responsible for the investment decisions, not the company. Workers change jobs frequently, so they may not be eligible for the company retirement benefits. Instead of a stable three legged stool, we are balancing on two legs at best. Social Security benefits are projected to be reduced in the future if changes are not made to the system. We are living longer. Health care expenses are higher, and more of those expenses are paid by the retiree, not the company or Medicare.
What does all that mean for retirement planning? The main takeaway is that YOU are responsible for your retirement. You have to be engaged in the retirement planning process in order to reach financial independence. You need a plan. It can be simple or complex, but no matter your income level, you need to plan for the day when you don’t want to work full time or you are unable to.
The main parts of a retirement plan include the following:
- What are your sources of income going to be?
- How much will you need to spend and want to spend?
- How much do you need to set aside now and how do you invest your savings?
For most people, the first place to save for retirement will be at work, in tax deferred accounts like 401(k)s and 403(b)s where you don’t pay taxes now, but they are due when you take the money out or in Roth versions, where you put in money already taxed, and then it is tax free when you take withdrawals (as long as you follow all the rules).
Try to contribute at least the minimum amount to receive any matching funds in your work plan. Strive to save 10% to 15% if you are in your 20s or 30s. If you are older, the percentage is really going to depend on what you did when you were younger. If you’ve been saving, then it may be enough to keep at that level, if you are later to the savings game, then your percentage could well be 20% or more. No matter what, it is never too late to start saving and planning!
The choices you make in your spending have a direct connection to how much income is available to save. For most people, housing and transportation are two areas that are within your control and are a large portion of your monthly budget. Choose carefully. Your future self depends on it!