How to plan for retirement

E*TRADE Securities2

03/15/17

Knowing how much should be saved for retirement can be hard to figure out. In this article, we’ll walk you through the steps needed to set a realistic retirement goal and create a sound action plan to achieve it.
 

STEP 1: Picture yourself in retirement

To get started, investors should consider a few important factors that will help shape their retirement plan and determine how aggressive they may need to be with their investments. These factors are:

How long until retirement?

The first thing someone should do is figure out how long they have until retirement, as this will determine how long they will have to continue saving and investing. A 35 year old today who plans on retiring at age 65, will have 30 years until retirement. If he or she hopes to retire earlier, say age 55 or 60, they will have less time for saving and investing. This is known as the time horizon.

How long will retirement last?

Next, individuals should estimate how long retirement assets will need to last. It is important not to underestimate this important projection, as this will have an impact on overall retirement needs. We are living longer today. It’s quite common for people to live to age 80 or 90; even living to age 100 is certainly not unheard of.

The type of retirement envisioned, along with expenses in retirement

In addition to projecting how long retirement may last, individuals also need to determine what kind of lifestyle they’d like to enjoy. That means considering the expenses that may be incurred during retirement. Will the mortgage be paid off? Will there be a lot of travel? Some people’s expenses will go down in retirement. However, if  the plan is to travel or help children or grandchildren with their education, expenses may actually go up, especially in the early years of retirement.

Current savings & investments

Finally, investors should think about current savings and investments already set aside for retirement. Funds set aside for purposes other than retirement, such as paying for your children’s educational expenses, a nice trip, a vacation home, or any other pre-retirement expenses should not be included.

 

STEP 2: Calculate a goal and create a plan

Once the information about time horizon, projected expenses, savings, and investments has been gathered, the Retirement Planning Calculator can be used to create a plan. In four easy steps, this tool will show how projected savings line up against anticipated retirement needs and determine whether there may be a shortfall or surplus at retirement.

 

STEP 3: Adjust for any projected shortfalls

If the Retirement Planning Calculator indicates that there may be a shortfall, there are many strategies one can use to get on track for retirement goals.

Starting early

There is a large advantage to starting early when investing for retirement. For example, assuming a 5% annual rate of return:

If an individual starts contributing $5,500 annually to a Traditional IRA at age 30, they will have $521,000 at age 65.

If they waited until age 40 to start contributing $5,500 annually to a Traditional IRA, they will have $275,000 at age 65.

And finally, if they waited until age 50 to start contributing $5,500 annually to a Traditional IRA, they will have $124,000 at age 65.

Investors can accrue an additional $397,000 by starting at age 30 compared to starting at age 50. The sooner savings starts, the more time may be used as an advantage. Alternatively, individuals can adjust their retirement start date to allow more time for saving and investing.

Employer matching contributions

Many individuals participate in a 401(k) or 403(b) plan, and chances are the employer will also match contributions up to a certain dollar amount or percentage of income. Investors should not overlook this very important benefit! When contributing to an employer’s plan, individuals should aim to contribute at least enough to earn the employer’s full match to take advantage of this benefit.

For example, let’s say an employer matches dollar-for-dollar on the first 5% of salary deferrals. By contributing at least 5% to the employer’s plan, that investor will earn the full matching amount. If they only contribute 3% of their salary, they are missing out on free money, since the employer is willing to match more. Over time, this could have a large impact on their nest egg.

IRA contributions

In addition to contributing to a work place retirement plan, many individuals also open an IRA. Traditional and Roth IRAs are accounts that allow for annual contributions and provide tax advantages as contributions grow over time. Everyone who earns a paycheck is eligible to contribute to an IRA—and a spouse is eligible to contribute, too, even if he or she has no income.

But most people want to know, “How do I choose between a Traditional and Roth IRA?” It depends on many factors. A Traditional IRA is generally right for those who are eligible to take a tax deduction now, or those who exceed the income limits to contribute to a Roth IRA, even though they will have to pay taxes on withdrawals later. If someone believes their tax bracket will be lower in retirement, they may want to consider taking the tax deduction available now with a Traditional IRA.

A Roth IRA is generally right for those who don’t exceed the maximum income to contribute directly to a Roth IRA, and prefer to have tax-free withdrawals in the future, even though  contributions are not tax-deductible now. If someone believes that their tax bracket may be higher in retirement, contributing to a Roth IRA may make sense.. Avoid potential future taxation by contributing to a Roth IRA.

Whether a contribution is made to a Traditional or a Roth IRA, the maximum contribution amount is $5,500 per year. For those age 50 or over, a higher contribution limit is allowed for IRAs. In the year an individual turns age 50, they are eligible to contribute $6,500 to an IRA, which is an additional $1,000 over the regular contribution limit of $5,500. It’s a great way to build up a retirement account balance, even if saving for retirement has been delayed.

Automatic investing plans3

Contributions to a workplace retirement plan are automatic since they are deducted from paychecks. This feature simplifies a savings program, since individuals don’t have to remember to send checks or to initiate contributions. Automatic investing plans are easy to set up and they reduce the temptation to skip making contributions in favor of other less important expenses.

Here’s how they work:

  • Choose a no-load, no transaction-fee mutual fund, an investment amount, and a savings interval. For IRAs, many people prefer to divide the annual contribution limit of $5,500 by 12 and invest $458.33 per month. Even if a budget won’t allow for a full contribution, individuals may consider setting up a small recurring contribution with which they are comfortable.
  • Funds are automatically transferred in the amount chosen—on the schedule chosen—from a bank, savings, or money market account. E*TRADE customers can even request to transfer funds from a non-IRA brokerage account at E*TRADE to an IRA.

Savings outside of retirement accounts

Saving for retirement may need to extend beyond retirement accounts. Even if someone contributes the maximum to an IRA and a 401(k), they may need to build additional resources. If the monthly targeted retirement savings exceed what is allowed to be saved in an IRA or employer’s plan, building additional assets in a taxable account or an emergency fund may be considered.

Diversification and asset allocation

Those who have been investing for a long time have probably heard the terms diversification and asset allocation. Diversification means dividing your money across different asset classes, each with a different potential for risk and return and driven by factors. There is no right asset allocation mix for diversification because every investor is different. Adding bonds, international investments, mutual funds, and ETFs are all ways to help build a more balanced and diversified portfolio.

 

STEP 4: Do an annual review

It is important to periodically review a retirement plan to make sure investments are still on target to meet retirement needs. Life events such as a job change, marriage, new baby, or an inheritance may impact a retirement savings plan. To keep on target, investors should periodically revisit their plan to make sure their retirement goals have not changed. If  goals have changed, they may want to adjust their plan if they are saving more or less than they hoped, plan to retire earlier or later, or anticipate greater expenses due to housing, health care, or other post-retirement needs.

For those who may have procrastinated on starting a retirement plan, they should not despair. It is never too late to start. Lost time can be made up by beginning today. E*TRADE Retirement representative are available at 1-877-921-2434 to help investors gain a better understanding of where they are today.