Money Basics Series: Retirement Planning
I know for a lot of us, retirement can feel so far away and hard to imagine. Some days it feels like I won’t make it to 8pm bedtime, let alone 2040. However, that doesn’t negate the importance of saving for your golden years. Here are a few key concepts to know and additional resources should you want to learn more.
You are responsible for you. Unfortunately, there are not many pensions available nowadays so you are really on your own out there. Your savings over your working life will represent all the money you have to care for yourself and live your dream life in your old age. Preparation is key to make sure you are well taken care of and can be the cool aunty who is always travelling.
You should aim to save 10-15% of your income for retirement. This is an ongoing commitment to your future self. While it can feel impossible to attain, if you start your career off doing this you won’t need to worry much about whether you will have enough in your old age. If jumping from 0% to 15% feels impossible due to budget constraints, then start at 5% and commit to increasing 2-3% every year.
Retirement-focused accounts can be broken into two categories- pre-tax and after-tax. Tax-preferred accounts are usually available through your employer such as a 401(k) or 403(b); or an IRA. They allow you to save for your retirement and fall into two two categories- either they allow for an up front reduction of your taxable income(pre-tax) or are after-tax and allow for tax free withdrawals in retirement. A 401(k) is an easy and most common way to save for retirement. Talk to your HR department about signing up. They usually provide a match too, which can help you go a long way towards getting to 15%.
Aim to replace about 80% of your income now in retirement. You may think you won’t have many expenses in retirement, but the reality is that getting old is expensive! Healthcare expenses and long term care costs (think nursing home or a home attendant) are really expensive and can really make up a huge portion of your ongoing expenses in retirement. It’s better to have more money put away than less anyway.
Don’t forget to add some fun in there! Financial planning can tend to be really scary and serious… unless you’re dealing with me! I like to ensure that my clients are planning for enjoyable things to do in retirement like spending a month in a new city every year or buying a beachfront condo. It isn’t all doom and gloom. I invite you to add your dream scenario into your retirement plan so you are eager to dedicate your entire raise towards your 401(k) next year!
I hope this gives you some helpful information and empowers you to save for your golden years. I promise, you won’t regret it!