The Truth about How to Reach Financial Security [Retirement]
There is a paradox in our lives, and it involves our time and our money. The majority of Americans in the workforce, trade their time for a paycheck. These paychecks are then used to pay for their lifestyle. In a recent survey by CareerBuilder, 4 out of 5 American workers say they live paycheck to paycheck in order to make ends meet. There ends up being no time to explore new hobbies, spend time with family, or to simply relax. These are things to look forward to after retirement.
But how can retirement requirements be meet if the majority of Americans are living paycheck to paycheck? Before deciding the best way to fund your retirement, you need to know what expenses you'll have and how much they will cost. Use our free worksheet to get a better understanding of your requirement needs for the future.
What amount is required for retirement?
Use this Retirement Worksheet to find out!
Most people will get the majority of their retirement income from some sort of portfolio withdrawals. This means you may not be able to rely on income from fixed sources such as annuities, Social Security, or pensions. By figuring out about how much is necessary for your retirement fund, you can better choose your investment vehicle. Keep in mind that the earlier you start investing the better. And by understanding your expenses, you are on the right track for starting your retirement plan.
Many people underestimate their expenses. To get the most accurate estimate for your future expenses, take a few months to track your current expenses. It will be easy if you already have a budget, If you don't you can check out my budget post here.
Also keep in mind that the Retirement Worksheet only takes continuous expenses into account. There will be times when you face a one-time expense. For example, paying for your child's wedding. So do take the time to consider if you plan on some large, one-time expenses in your future and add that to the worksheet.
The reason there is a discretionary expense section in the worksheet, as it is not considered essential, is because you probably have an idea what you want to do during your retirement. And if your idea includes living your current lifestyle, or traveling, you will need to include those costs into your budget. The idea is, you want these options, but if money is tight you could go without.
Questions to Consider
If you are looking at your current budget, and using that information in your Retirement Worksheet, think of any expenses that may be continuous now, but will be finished by the time you retire. For example, a mortgage is a fixed expense that only lasts a certain number of years. Are you planning on moving or downsizing your home? When you do retire, what will happen to your benefits such as health insurance? Consider what may change, it doesn't have to be exact. You can, and should make updates to your retirement plan as necessary. As your life evolves, your plan will need to reflect those changes.
Now that you have a good idea of how much you will need for retirement, you will need to start thinking about the right investment vehicles to get you there. There are numerous investment plans out there, and it may take some research to figure out what's best for you. Here's a couple plans to get you started:
401(k) or 403(b) Plans
A 401(k) is a retirement savings plan that you could get through your employer. It lets workers save and invest a piece of their paycheck before taxes. The taxes are not paid until the money is withdrawn from the account.
A 403(b) plan, or a tax-sheltered annuity (TSA) plan, is a retirement plan for certain employees of public schools, employees of certain tax-exempt organizations, and certain ministers. With this plan, you don't pay income tax on allowable contributions until you begin making withdrawals from the plan, which is normally after you retire. Your earnings and gains on amounts are not taxed until you withdraw them. And you may be able to take a credit for elective deferrals contributed to your account.
If you have the ability to invest in either of these plans and your employer provides a matching contribution, you should fund this account up to the limits of the matching contribution. By doing this, you are guaranteeing a return of no less than 50% per year.
If you do not have the opportunity to invest in a 401(k) or 403(b), but do qualify to make a Roth IRA contribution, you should utilize this investment vehicle. If you have the ability to contribute to both, that's even better. You do not receive tax deduction by contributing to a Roth IRA, but all earnings accumulate on a tax-deferred basis, and all withdrawals taken out during retirement are tax-free. There are limits on how much you can contribute to a Roth IRA each year, depending on your age. You can see why it is so important to start young, it is such an advantage to have those extra years of contributions to your Roth IRA.