As one of the top editors at My Bank Tracker, Claire Tak is an expert in retirement planning and figuring out what you need to save. She spoke with us about how to plan for retirement the right way.
What are some common misconceptions you see about retirement planning?
One of the biggest misconceptions folks have about retirement planning is that they won’t need as much money when they retire, so they don’t save enough. The truth is that with more free time on their hands, retirees will spend more, especially during the first few years of retirement. From traveling to potentially moving states, retirees are likely to spend big as they enjoy their retirement. A general rule of thumb: Retirees should aim to save about 80 percent of their pre-retirement income to maintain their current standard of living in retirement. However, this rule won’t fit everybody. It depends on your individual needs and how you plan to live in retirement.
Two other big misconceptions: It’s too early to save for retirement and it’s too late to save for retirement. The truth is, the best time to save for retirement is when you are young. As people age, their earnings potential should increase – and so should their retirement savings. Even people who have struggled to save for retirement shouldn’t be dismayed as they age. It’s never too late to save for retirement. Better late than never!
Other misconceptions include retirees believing that Medicare will be enough to pay for their healthcare expenses, that retirement means not working ever again and that Social Security will take care of folks in their twilight years.
If you’re not experienced with investing, what’s the first step in saving for retirement?
You don’t even really have to have experience with investing to save for retirement. The first step you should take is setting your retirement goals. When do you want to retire? How is your health? How much can you realistically save? What type of lifestyle do you want in retirement? Many of these questions carry an air of uncertainty, but you have to consider them as you begin planning. Then, you want to set targets, estimating your monthly expenses in retirement and how much you’ll need to save to live the life you want in your golden years.
How much should we set aside for retirement out of our paychecks?
The answer really varies depending on an individual’s circumstances and goals. If you have high debt, you should definitely aim to get rid of it, for instance. Generally, as much as you can. Aim for at least 10-15 percent, increasing that amount as you inch closer to retirement. You want to be aggressive about it.
If money’s tight, should retirement saving be a priority, or should it take a back seat to other needs?
Saving for retirement should always be a priority. While big debt like carrying a mortgage or saving for your kids’ college might seem more pressing, retirement shouldn’t take a back seat to these financial needs. If money is tight, look for ways to cut your budget or increase your income.
How is student debt affecting retirement saving? How do you balance paying off debt and saving for retirement?
Student debt is definitely a ballooning problem, and most new or recent graduates probably aren’t thinking about retirement as they search for work. But the best time to save for retirement is when you are young. It might not seem plausible if you have $50,000 to $100,000 or more in student debt, but the earlier you can save for retirement, the better off you will be in the long run. Definitely save for retirement, but also work on paying down your student loans. You want to find a balance. Take advantage of your company’s retirement plan if they have one – contribute enough to earn the full employer match. You want to aim to save about 10 percent of your salary as you begin working, but even if you can’t reach that amount, at least save some percentage of your paycheck. As you save for retirement, work towards paying down your debt as well, focusing on getting rid of your highest interest loans. You might also consider various repayment options to help you get rid of your student loans.
How will retirement change between now and when younger workers retire?
Your retirement is going to be very different from your parents’ retirement. For one, traditional career choices people make these days are changing. For another, people are living longer. One trend to keep an eye on is semi-retirement. More retirees are working part-time jobs in their golden years. Also, employers have increasingly shifted away from offering traditionally defined benefit retirement plans and are instead offering defined contribution plans.
Really, though, the only retirement trend you need to be worried about is the fact that most Americans aren’t saving enough for retirement. You don’t want to be one of those people.
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