Memorable vacations do not happen by chance. They require a certain level of effort and planning to ensure that you stay within your budget and maximize your actual time away for fun, sightseeing and relaxation. The more you plan, the more likely your getaway will meet your expectations. With this in mind, it is surprising that so few people take the time to plan ahead for the longest vacation of their lives: retirement.
Saving for retirement is more of a marathon than a sprint. It requires significant planning and discipline to start as early as possible to meet your ultimate goals. Too often, individuals wait until the last decade or two of their working lives to evaluate what they will need to afford a comfortable retirement, let alone commit to a retirement savings plan to help them pay expenses during that period. In fact, according to the Employee Benefit Research Institute’s (EBRI) 2022 Retirement Confidence Survey, only 28 percent of workers feel very confident that they can afford a comfortable retirement.
The first step in planning for retirement is to consider how you would like to spend your free time for 20, 30 or even 40 years. Do you hope to enjoy your time on the golf course, vacationing in exotic locales or traveling frequently to spend time with out-of-state family and friends? Do you hope to have a second home or to purchase a boat?
As lofty as your goals may be, you must also consider your ability to cover the related costs along with your ongoing responsibilities to pay for everyday expenses, such as taxes, insurance premiums, medical care, utilities and the general maintenance and upkeep of your home. Remember that many of these expenses will undoubtedly increase as you age, requiring you to build up more significant reserves to help you afford them in the future. This is especially important when considering that people today are living longer. According to Social Security Administration estimates, one out of every four 65-year-olds today will live past age 90, and one out of 10 will live past age 95.
So, how much money will you need to afford the retirement of your dreams? The answer depends on your unique circumstances and goals. However, as a rule of thumb, the average person should aim to replace approximately 80 percent of their annual pre-retirement income. Just as a vacation budget should consider all of the out-of-pocket expenses you will incur once you arrive at your destination, your general retirement budget should reflect all of the out-of-the-ordinary extra perks you expect to enjoy during your golden years.
While soon-to-be retirees can count on Social Security to fund approximately 34 percent of their replacement income, this amount is neither sufficient for a comfortable lifestyle nor guaranteed to continue as a source of income for retirees. As a result, it is critical that individuals of all ages estimate their future retirement expenses and develop a formal plan for saving enough to afford those costs and then some. Because one’s needs and goals change over time, this preplanning exercise will continue to evolve. The sooner you start planning, the better prepared you will be.
Thankfully, most businesses today offer their employees access to 401(k) plans that enable workers to defer a portion of their wages toward retirement savings automatically. Those contributions lower workers’ taxable income in the year they are made and benefit from compounding interest and market gains that can increase balances significantly beyond their contribution amounts. Moreover, many employers “match” a portion of workers’ contributions. To receive this benefit, which is comparable to free money, the minimum that workers need to do is to contribute the maximum amount that will qualify them for the savings match.
Failing to plan is Planning to Fail
While you cannot plan for everything in life, you can take steps to be as prepared as possible. The earlier you start, the more likely you will be able to manage life’s uncertainties and enjoy the fruits of your labor in retirement. Make the time now to plan ahead.
About the Author: Olga Ismail is the head of Retirement Plan Consulting and a financial advisor with Provenance Wealth Advisors (PWA), an Independent Registered Investment Advisor affiliated with Berkowitz Pollack Brant Advisors + CPAs and a registered representative with PWA Securities, LLC. She can be reached at the firm’s Fort Lauderdale, Fla., office at (954) 712-8888 or info@provwealth.com.
Provenance Wealth Advisors (PWA), 200 E. Las Olas Blvd., 19th Floor, Ft. Lauderdale, FL 33301 (954) 712-8888.
Olga Ismail is a registered representative of and offers securities through PWA Securities, LLC, Member FINRA/SIPC.
This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct.
Any opinions are those of the advisors of PWA and not necessarily those of PWA Securities, LLC. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of PWAS, we are not qualified to render advice on tax or legal matters. You should discuss any tax or legal matters with the appropriate professional. Prior to making any investment decision, please consult with your financial advisor about your individual situation.
401(k) plans are long-term retirement savings vehicles. Withdrawal of pre-tax contributions and/or earnings will be subject to ordinary income tax and, if taken prior to age 59½, may be subject to a 10 percent federal tax penalty. Investing involves risk, investors may incur a profit or loss regardless of the strategy or strategies employed. Future investment performance cannot be guaranteed. Matching contributions from an employer may be subject to a vesting schedule. Please review your retirement plan documents or consult with a financial professional for more information.
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Posted on August 6, 2024