America Saves Week 2021: saving for retirement

America Saves Week 2021, February 22 – 26, is an annual call to action for everyday Americans to commit to saving successfully. LSS Financial Counseling is among the participating organizations that are encouraging savers nationwide to set a goal for savings and make a plan to improve financial stability. As part of that effort, we are publishing three blogs this month. The first post is on saving for retirement.

The keys to success when saving for retirement are creating a plan, deciding which savings vehicles are best for you, and monitoring your progress to reach your goals.

How Much Do You Need to Retire?

To retire comfortably, a common rule of thumb is to have enough so you can live each year on 80% of your pre-retirement income. However, the exact amount for you will depend on several factors. AARP outlines several questions to ask yourself:

• How much will you spend? Will you still have a mortgage payment, or is your house paid for? Do you have other outstanding debt that you will still be paying in retirement (student loans, home equity loans, car payments)? Will you move into an apartment? Do you plan to travel a lot? Do you already have significant medical expenses? After you retire, you can subtract the work-related expenses that you once again will have when the pandemic ends (e.g., commuting, new clothes purchases, dry cleaning).
• What other sources of income will you have?  How much will you receive in Social Security benefits?  Will you have a pension? Do you plan to take on part-time, temporary or free-lance work? After calculating income, you’ll need to estimate how much you will need to withdraw from your investments each year in retirement.
• How much will you earn on your investments? This will depend on the particular investment. While no one can predict future earnings, stocks have traditionally earned more than bonds. Bonds have earned more than certificates of deposit (CDs), and CDs have earned more than money market savings accounts. (See Types of Retirement Investments below.)
• How long will you live?  No one really knows, of course, but you can look at average life spans. At 65, the average man can expect to live another 18 years, according to Social Security. The average 65-year-old woman can expect another 20.5 years. Also, think about the about the ages of your parents and grandparents when estimating life span.

Steps to Take Before Saving for Retirement

Put together a realistic household budget. Consistently track BOTH fixed (i.e. mortgage/rent, insurance, utility bills) and variable monthly expenses, such as gasoline, food and entertainment. Eliminate credit card and other debt as much as possible. The more debt you eliminate and the more unnecessary expenses you cut, the more money you will have available during retirement.

Make sure you’re meeting your short-term goals first. Create an emergency savings fund of at least three to six months’ worth of income before investing for the long-term. (The exception to waiting to save for retirement is an employer-sponsored retirement account; see below.)

Types of Retirement Investments

1. Employer-sponsored retirement plans: In for-profit companies, these are referred to as 401(k) plans; in non-profit agencies, they are called 403(b) plans. In either plan, you have money withdrawn pre-tax from your paycheck, which will lower how much you pay in taxes. In addition, the earnings on these accounts are tax-deferred; as long as you keep the money in the plan, you pay nothing to state and federal governments. Companies often match whatever amount is deducted from your pay. If your company offers this, aim to contribute at least as much as you need to receive the maximum employer match. Typically, your employer’s plan will offer you several options for investing. These will vary in the amount of risk and the opportunities for larger returns.
2. Individual Retirement Account (IRA):  There are two types of IRAs: traditional and Roth. For both types, earnings on your investment are tax-deferred during your working years. Contributions to traditional IRAs are deductible from your taxes for the year in which you make them, subject to certain restrictions. However, you will pay income taxes on money you withdraw from the account in retirement. Contributions for Roth IRAs are not tax-deductible, but your withdrawals in retirement are not taxable. There are also limits on how much you can contribute to your Roth IRA each year. Set a goal to contribute the maximum amount allowed to your IRA for a given year. Read NerdWallet’s blog on IRA limits and deductions. Like employer-sponsored plans, you have several options for investing when you open an IRA. And like employer plans, these will vary in the amount of risk and opportunities for larger returns.
3. Certificates of deposit (CDs) are savings accounts where money is deposited for a “term”, or a specific amount of time , generally at a set rate of interest throughout the term. There are typically penalties for early withdrawals.
4. Money market accounts are a special type of savings account in a bank or credit union in which the interest rate is usually higher than regular savings accounts. There are often restrictions on these accounts, for example, the maximum number of transactions each month, minimum balance requirements and fees.
5. Stocks, bonds and mutual funds offer the possibility of higher returns, along with higher risks than CDs or money market accounts. When you purchase stocks, you are buying a share of ownership in a company. When you purchase bonds, you are in effect giving a loan to the company or government to finance their projects and operations, with the expectation of being paid back at a set interest rate. When you buy a mutual fund, you are buying a share in the stocks, bonds, CDs, and/or money market accounts that the fund has invested in, with the expectation that those investments will grow in overall value. Ask about rates of returns, fees, and risk levels when considering these investments.
6. Annuities are long-term investments issued by an insurance company. What you purchase from the company is converted into periodic payments that can last for life. The value of your annuity changes based on how those investments perform; therefore, your annuity could potentially decrease in value and you could lose money. Be sure to ask about any associated fees.

Please note: LSS Financial Counseling does not give advice on investments. Consult with a reputable financial planner to discuss the types of investments that are right for you.

Steps to Take While Saving for Retirement

Revisit your retirement plan once or twice a year to ensure it's on track for your planned retirement date. Make adjustments as needed to your plan and to your budget.

1. Review your assets. Look not only at your retirement investments, but your emergency and other short-term savings accounts, equity in your house and other items with significant value.
2. Examine cash flow and expenses over time. Be aware of changes in spending, and be realistic on future spending needs. For example, you might have higher medical expenses, or maybe you intend to travel more.  If you pay off or incur additional debt, adjust your budget and your savings goals to accommodate those changes.

The U.S. Department of Labor has helpful advice on saving for retirement at each stage of your life. In addition, there are online calculators, like one from AARP, to help you determine if you are on track to meet your retirement savings goals.

If you need support in creating a budget, monitoring your income and expenses or establishing savings goals, LSS Financial Counseling can help. Think of LSS like you think of annual visits to your doctor – a periodic check-up on your financial health to make sure you’re on track to meet your financial goals. Call 888.577.2227 for a free, confidential appointment, or get all your support online.

Ray McCoy is a Certified Financial Counselor with LSS Financial Counseling.