Suzanne Gellman, MS, JD
Financial Education Specialist
Most of the challenges I hear these days about saving for retirement focus on three areas: how much to save, where to find money to save, and what investment options to choose. Here are seven things to do to help you address those challenges.
1. Start sooner rather than later. The sooner you start planning and evaluating if you are on track, the more options you have to address shortfalls. The sooner you set money aside for retirement, the more time it has to grow and earn interest on interest. Donít wait until after you figure out how to pay for childrenís college. You should save for both at the same time. Remember, there are no loans or scholarships for retirement. Do what you can to help with your childís college education after you figure out what you are going to need for retirement and after you begin saving.
2. Calculate expected expenses in retirement. Use current and projected expenses to estimate a yearly amount youíll need. You can use online forms and calculators to help you adjust expenses for inflation. Prices will increase until you retire and during retirement. Most people need 80% to 100% of peak income to live comfortably. Even though some expenses decrease in retirement, other expenses increase, like healthcare and leisure.
3. Set a written goal for retirement. Create a written plan, including how much youíll need in retirement, based on todayís dollars. Check with your employer about what you can expect from any employer-sponsored plans. Using online calculators, you can estimate the nest egg you need to retire that will pay you the yearly income needed for expenses. The same calculators will help you figure out if you are saving enough or need to adjust your plan. Donít forget to factor taxes and inflation into your plan.
4. Participate fully in 401(k)s, 403(b)s, IRAs. Social Security may be a nice supplement to other retirement income, but you donít want to rely on Social Security or employer-sponsored pension plans to be sufficient for a comfortable retirement. Have other sources of retirement income
from funds you have set aside in
401(k)s, 403(b)s, and IRAs. Use automatic payments or paycheck withdrawals to make saving easy.
5. Find money to save. If youíre like many people and arenít saving enough, here are some options:
4Re-evaluate priorities. Find a
better balance between spending now and saving for later. Look at your current spending. Can you reduce interest expenses and credit use? Can you reduce spending on habits and hobbies? Have you re-evaluated your insurance lately? (This is often an area where people overspend.)
4Earn extra income. Can you or your spouse or partner find additional income that can be entirely directed toward retirement savings? Do you have a skill or hobby that could make you extra income? Can you work an extra job or extra hours a few months a year? Can you ask for a raise and direct all or most of the raise to savings?
6. Track your progress. Do this by using online financial calculators or working with a financial planning professional. If you find youíre not on track even by saving more, consider other options in addition to saving more:
4Delaying retirement even by two or three years can give you more time to save, reduce the amount of time you are dependent on retirement savings and the required nest egg, and potentially increase Social Security benefits.
Working part-time in retirement can reduce the amount of money you need to live on initially in retirement and make your savings last longer.
Reducing your expected expenses by even a fairly small amount a year (i.e., $1000 a year or $83 per month) can help your savings last longer. Experiment with different strategies or a combination of strategies to reach your goals using online calculators and information through such sites as:
4MU Extension: http://extension.missouri.edu/wfes
7. Consider a target retirement fund. If youíre overwhelmed with investment options for retirement and donít have the time or are not inclined to rebalance your investments each year, consider a target retirement/lifestyle mutual fund that diversifies and rebalances for you. You select a target retirement fund based on the approximate year you plan to retire. The target mutual fund contains other diversified mutual funds and changes the balance of funds it owns to become more conservative as you get closer to retirement, yet still maximizes returns. Most company retirement plans offer a target mutual fund as one of your choices. Most investment companies offer this type of fund, but allocations and fees differ. Like most other products, shop around before buying.