Knowing how much you need to save for retirement can be hard to figure out on your own. 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, you’ll need to consider a few important factors that will help shape your retirement plan and determine how aggressive you need to be with your investments. These factors are:
How long until you retire
The first thing you need to do is to figure out how long you have until you retire, as this will determine how long you have to continue saving and investing. If you are 35 years old today and plan on retiring at age 65, you have 30 years until you retire. If you hope to retire earlier, say age 55 or 60, you will have less time for saving and investing. This is known as your time horizon.
How long you plan on being in retirement
Next, you will need to estimate how long your retirement assets will need to last. Make sure not to underestimate this important projection, as this will have an impact on your 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 you envision, along with your expenses in retirement
In addition to projecting how long you will live in retirement, you’ll also need to determine what kind of lifestyle you’d like to enjoy. That means you need to consider the expenses you will incur during your retirement years. Will your mortgage be paid off? Will you want to travel frequently? Some people’s expenses will go down in retirement. However, if you plan on traveling or helping children or grandchildren with their education, you may be surprised that your expenses may actually go up, especially in the early years of retirement.
Your current savings & investments
Finally, think about the current savings and investments you have already set aside for retirement. Make sure not to include funds you may have 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.
STEP 2: Calculate Your Goal & Create a Plan
Once you’ve gathered information about your time horizon, projected expenses, savings, and investments, you can use our online Retirement Planning Calculator to create a plan. In four easy steps, this tool will show you how your projected savings line up against your anticipated retirement needs and determine whether you will have a shortfall or surplus at retirement.
STEP 3: Adjust for Any Projected Shortfalls
If our Retirement Planning Calculator indicates that you may have a shortfall, there are many strategies you can use to get on track for your retirement goals.
There is a large advantage to starting early when investing for retirement. For example, assuming a 5% annual rate of return:
If you start contributing $5,500 annually to a Traditional IRA at age 30, you will have $521,000 at age 65.
If you waited until age 40 to start contributing $5,500 annually to a Traditional IRA, you will have $275,000 at age 65.
And finally, if you waited until age 50 to start contributing $5,500 annually to a Traditional IRA, you will have $124,000 at age 65.
You’ll accrue an additional $397,000 by starting at age 30 compared to starting at age 50. The sooner you start saving, the more you can use time to your advantage. Alternatively, you can adjust your retirement start date to allow more time for saving and investing.
Employer matching contributions
If you participate in a 401(k) or 403(b) plan, chances are your employer will also match your contributions up to a certain dollar amount or percentage of your income. Don’t overlook this very important benefit! When contributing to your employer’s plan, you should aim to contribute at least enough to earn your employer’s full match to take advantage of this benefit.
For example, let’s say your employer matches you dollar-for-dollar on the first 5% of your salary deferrals. By contributing at least 5% to your employer’s plan, you will earn the full matching amount. If you only contribute 3% of your salary, you are missing out on free money, since your employer is willing to match more. Over time, this could have a large impact on your nest egg.
In addition to contributing to your work place retirement plan, you should consider opening an IRA. Traditional and Roth IRAs are accounts that allow you to make annual contributions and provide tax advantages as your contributions grow over time. Everyone who earns a paycheck is eligible to contribute to an IRA—and your 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 you if you are eligible to take a tax deduction now, or you exceed the income limits to contribute to a Roth IRA, even though you will have to pay taxes on withdrawals later. If you believe your tax bracket will be lower in retirement, you may want to consider taking the tax deduction available now with a Traditional IRA.
A Roth IRA is generally right for you if you 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 your contributions are not tax-deductible now. If you believe that your tax bracket may be higher in retirement, contributing to a Roth IRA may make sense for you. You can avoid future taxation by contributing to a Roth IRA.
Whether you contribute to a Traditional or a Roth IRA, the maximum contribution amount is $5,500 per year. If you are over age 50, don’t overlook the higher contribution limits allowed for IRAs. In the year you turn age 50, you 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 your retirement account balance, even if you have delayed saving for retirement.
Automatic investing plans
Contributions to your workplace retirement plan are automatic since they are deducted from your paycheck. This feature simplifies your savings program, since you 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 your budget won’t allow you to make a full contribution, consider setting up a small recurring contribution with which you are comfortable.
- Funds are automatically transferred in the amount you choose—on the schedule you choose—from your bank, savings, or money market account. You can even request to transfer funds from your non-IRA brokerage account at E*TRADE to your IRA.
Savings outside of retirement accounts
Your savings for retirement may need to extend beyond retirement accounts. Even if you contribute the maximum to an IRA and your 401(k), you may need to build additional resources. If your monthly targeted retirement savings exceed what you are allowed to save in an IRA or employer’s plan, you may need to consider building additional assets in a taxable account or an emergency fund.
Diversification & asset allocation
If you’ve been investing for some time, you’ve 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. All of this can be done easily at E*TRADE through our Online Portfolio Advisor, or by speaking with a Financial Consultant.
STEP 4: Review Your Plan at Least Annually
It is important that you periodically review your retirement plan to make sure you are still on target to meet your retirement needs. Life events such as a job change, marriage, new baby, or an inheritance may impact your retirement savings plan. To keep on target, you should periodically revisit your plan to make sure your retirement goals have not changed. If your goals have changed, adjust your plan if you are saving more or less than you hoped, plan to retire earlier or later, or anticipate greater expenses due to housing, health care, or other post-retirement needs.
If you’ve procrastinated on starting a retirement plan, don’t despair. It is never too late to start. You can make up lost time by beginning today. Feel free to reach out to an E*TRADE Retirement Specialist at 1-877-921-2434 to gain a better understanding of where you are today—and what you can do to reach your retirement goals on target and on time. We’ll be happy to help.
Automatic Investing Plans and dollar-cost averaging do not ensure a profit and does (do not) not protect against a loss in declining markets. Investors should consider their financial ability to continue their purchases through periods of low price levels.
The content presented by E*TRADE Securities are for educational purposes only. The content neither is, nor should be construed, as an offer, or a solicitation of an offer, to buy, sell or hold any securities by E*TRADE Securities. E*TRADE Securities does not offer or provide any opinion regarding the nature, potential, value, suitability or profitability of any particular investment or investment strategy, and you are fully responsible for any investment decisions you make. Such decisions should be based solely on your evaluation of your financial circumstances, investment objectives, risk tolerance and liquidity needs.