When you’re caught up in daily routines, it can feel nearly impossible to focus on anything as distant as retirement. Unfortunately, we have to tell you that you might not be able to retire at the same age as your parents. The average retirement age is gradually increasing. For instance, in 1986, men typically retired at around 62 and women at about 57. Fast forward to 2016, and those figures had shifted to approximately 65 for men and 63 for women. That’s a substantial rise, particularly for women. Regardless of how far off retirement may seem, it’s never too early to begin your financial planning.
Not sure where to begin? It can feel overwhelming, but you’re definitely not alone in your uncertainty. In fact, recent data shows over 60,500 monthly searches specifically about retirement planning. Everyone starts from somewhere, and the key is to educate yourself on various options to determine the best path for you. For example, you might want to utilize a retirement planning calculator to crunch some numbers or read about the differences between trusts and wills. What about retirement annuities? Confused yet? Here’s a straightforward guide to help you navigate retirement planning, including resources for self-employed individuals.
Assess How Much Money You’ll Need for Retirement
First things first: if you’re living paycheck-to-paycheck, saving for retirement can feel daunting, if not impossible. But if you have the means to start saving, now is the time. The initial step is estimating how much money you’ll need to live comfortably during your retirement years. While there are no guaranteed methods for this, a rough calculation can help guide your saving efforts.
Paula Thompson at Financial Insights suggests, “Assume that your current spending will be somewhat similar when you retire.” While you might shed some expenses, like your mortgage, you could also incur new ones, such as travel or increased healthcare costs. Once you have a rough estimate for one year of retirement, multiply that figure by 25. Yes, it will likely seem huge! For instance, if you hope to live on $40,000 annually, you’ll need a portfolio of $1 million.
Retirement Plans for Self-Employed Individuals
Not having a traditional full-time job with benefits doesn’t mean you can’t have a retirement plan. Consider opening a traditional or Roth IRA, which are straightforward options for self-employed workers looking to save. You might also explore a solo 401(k), a SEP IRA, or a SIMPLE IRA. Each plan comes with its own set of benefits, so for detailed information, check out this guide on retirement plans for the self-employed.
Catching Up on Retirement Planning
If you find yourself starting to think about retirement later in life, don’t be too hard on yourself. Not everyone has the same opportunities, and it’s perfectly understandable to be in this situation. So, what can you do to catch up? Experts at Money Matters suggest that individuals in their 50s should start saving aggressively. For example, if a couple saves $500 a month, they could amass $145,000 in just 15 years! For those saving $1,000 monthly, that figure could double. However, this may still feel insufficient, so you might consider delaying retirement or exploring ways to generate supplemental income.
Consider Social Security
Will Social Security still be around when you retire? The future is uncertain! However, since it’s still operational, it’s wise to estimate how much you might receive. Use the Social Security Administration’s Retirement Estimator for a ballpark figure. While this is merely an estimate, it can help you understand your potential income from this source. Remember that self-employed individuals are also eligible for benefits if they contribute to Social Security.
After estimating your Social Security benefits, tally it with any other retirement income sources, such as pensions or rental properties. For instance, if you aim for $60,000 a year in retirement and estimate $20,000 from Social Security and a small pension of $5,000, you’d need an additional $35,000 from your retirement portfolio, translating to a total of $875,000 to sustain you for 25 years.
Determine Your Savings Goals
With a clearer picture of how much you’ll need, it’s time to figure out how much to save. While retirement calculators won’t provide exact amounts, they can offer a useful estimate of your savings needs. A quick search for “retirement calculators” will yield countless options, but not all are created equal. Thankfully, experts have reviewed various calculators, such as those from AARP and MarketWatch, to guide you in accounting for factors like taxes and inflation.
Saving and Investing
You might find that you need to save more than you initially thought. Now is the moment to buckle down and devise a solid plan. This doesn’t necessarily mean taking a big chunk out of each paycheck (though that’s certainly a great strategy). In fact, consider exploring ways to cut costs in areas like groceries and transportation to boost your savings.
Additionally, think about diversifying your retirement portfolio with stocks, bonds, or higher-yield accounts. While these investments can increase your retirement savings, they come with risks, so weigh your options carefully.
Preparing for Your Financial Planner Meeting
When meeting with a financial planner, it’s crucial to ask the right questions and come prepared. Gather the following documents:
- Latest statements for all accounts (e.g., IRAs, 401(k)s)
- Information about other investments (e.g., stocks, real estate)
- Compensation details (e.g., pay stubs, pensions)
- Monthly expenses (e.g., mortgages, loans)
- Recent tax records
- Estate planning information (e.g., wills, insurance)
Prepare questions like:
- What is my current financial standing?
- Should I adjust my retirement timeline?
- Are there any recent life changes that could impact my finances?
- Am I on track with my retirement savings?
- Is my portfolio adequately diversified for my goals?
This article originally appeared on March 24, 2020.
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Summary
Retirement planning may feel overwhelming, but starting early and knowing your options is crucial. Whether you’re self-employed or catching up later in life, understanding how much you’ll need and how to save effectively can set you on the right path. Be proactive about your finances and seek guidance when needed.
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