As I drive to and from work, I listen to country radio, and I just heard a new song! The Fighter by Keith Urban and Carrie Underwood has a great sound, and the lyrics ring out to me as a Financial Planner!
Carrie: What if I fall?
Keith: I won’t let you fall.
Carrie: What if I cry?
Keith: I’ll never let you cry.
Carrie: If I can’t stand?
Keith: I’ll hold you tighter. When they try to get to you baby, I’ll be the fighter.
Having a plan to secure your future may not be necessary if Keith Urban is your partner! He won’t let you fall. He won’t even let you cry! However, without Keith, we may need to face the reality of planning for a secure future.
I’ve read so many articles lately, documenting studies that show we aren’t saving enough for retirement. Just yesterday, I listed to a podcast where David L. Bach, a financial author, television personality and motivational speaker mentioned, “more money is spent on lottery tickets than invested into retirement accounts.” What can you we do about that? David suggests automating savings into your retirement account. We will get to that in a bit. First, let me help you understand the “why.”
Right now, your lifestyle is funded by your income. Generally, this income comes from your employment. Some people have other forms of income, such as rental income or investment income. However, most of your income probably comes from your work.
How long would you like to work? Have you thought about retiring at some point in the future? Retirement may look different than previously thought. It might include working less or working by choice. In order to have a choice to work in retirement, we have to be prepared to fund our lifestyle without our current income from fulltime work.
Social Security is only one source of income during retirement. As a Certified Financial Planner, I have learned quite a bit about Social Security and possible expectations for the future of the Social Security program. One current thought is to project only 75% of what we anticipate for our monthly income from Social Security benefits. There is plenty to think about when planning for Social Security, but for starters, review the statements they mail to your home every five years. Look at the projected retirement benefit at your age 62, full retirement age and at age 70. You will notice the amount increases for every year you wait to begin benefits. Let’s start our analysis with the benefit at your Full Retirement Age. Now, take 75% of that number. This is just an estimate of what your future benefit might be, based on some reasonable assumptions of decreases in benefits.
Quick Tip: If you haven’t already, register at ssa.gov so that the Social Security Administration has your email address and other contact information.
Now, with a Social Security benefit in mind, how much more will you need to fund your lifestyle when you are no longer employed? Do you have any other forms of income that will last in your retirement? You might be the recipient of a large life insurance policy, or you may have pension income or rental property where you receive monthly income, but if not, consider creating a retirement account and begin (or increase) your savings now.
To encourage us to save for retirement, the government gives us tax incentives! Our taxable income is reduced by retirement contributions!
There are a few choices on how to save for retirement. First, do you have a retirement program at your workplace? Some companies offer a 401(k) or 403(b) account. Some employers offer to match your contributions, up to a certain percent of your salary. Make sure you participate in this plan, at least up to the percentage match. Ideally, you should be saving 10-15% of your salary into your retirement account. Current maximum annual contributions are $18,000. For those over 50 years of age, contribution limits are $24,000. The best way to save is if your employer deducts the contribution from your paycheck. That way, once you get your paycheck, your savings is already done!
Another benefit is reduced taxable income. When you get your W-2 form (any day now), if you’ve saved for retirement through your work, you will notice your Wages are lower than your Social Security income. That is because of your retirement contributions! If you make retirement contributions at work, your wages will be lowered by the amount saved. Lower wages means lower taxes paid.
If you do not have access to a workplace retirement account, consider starting your own account at a bank, brokerage firm, or with a robo-advisor. IRA limits are $5,500 per year (and $6,500 per year if over age 50). Note: if you are married, and your spouse has a work based plan but you do not, there are income limits for IRA participants. You may even qualify for a Retirement Savers Tax Credit! Start now!