You need:
- A goal for what you would like to do in retirement
- An estimation of how much money you will need
- A plan to go from here to there, comfortably
- Other planning (Last will and testament, living will, trusts, PODs, etc)
How to plan for what you need (and want) during retirement
Here is a simple question: what would you like to do during retirement?
For some, they want to travel. They want to see Paris at night, enjoy Rome in the morning and watch the sunset during a tour of the pyramids. For others, they simply want to have their home paid off and it back and watch the world go by for a little bit.
What you want to do is just as important as what you need to do.
For most Americans, to retire completely comfortable, you need anywhere from $300,000 to $1,000,000 across all accounts. This may seem like a lot, but the average mortgage in the U.S. s just over $309,000, and the average FHA loan is around $100,000. Couple that total with the price of a car, and possible healthcare bills (totaling anywhere from $200,000 to $300,000), and you can see how our estimates are fairly solid.
Now you know what you need, where do you start?
The most simple way to start building up your savings is by started a savings account. The general idea of a savings account is that it will be money untouched by normal transaction. In other words, a checking account is used for transactions, bill payments, etc, but a savings account is used for long-term need.
So how much can you save?
Well, let’s say that every paycheck you can afford $20. And, you are 30. If you keep depositing money, without withdrawing from your savings, when you hit 67, you will have $19,240 saved.
But what if we start earlier? And what if we save even more?
Instead, let’s assume you start this particular savings account at 20. And, instead of $20 every two weeks, you deposit $100. By the time you reach 67, you will have $122,200 saved!
Savings accounts, remember, are considered completely liquid cash. They don’t see a lot of growth (usually <1% interest).
This is why we also recommend you start a retirement account.
What is a retirement account?
A retirement account allows you to contribute money on a regular basis. The manager of the account then allocates those dollars into investments that help to grow your money over time.
The bad news about retirement accounts…
You CANNOT withdrawal money from them without risking the threat of serious penalties in the form of fees and taxes on those withdrawals.
But, there is good news. Specifically, you can contribute into your retirement account before taxes. As well, retirement accounts can yield free money when an employer-sponsored version is used.
How much can your retirement account grow?
Let’s use the examples above…
In our first example, the person deposits, or contributes, $20 per bi-weekly pay, starting at 30 until 67. Let’s assume a standard 6% growth on investment. At age 67, their account is worth $71,786.71.
But, let’s look at this a different way. Instead, let’s assume the person started the account at 20. And, they deposited $100 per bi-weekly pay. At a 6% growth, at age 67, they will have an account worth about $690,000.
Other things to consider
For many, facing death is not a simple thing. But, planning for the our wishes to be met is empowering.
A few things you might want to consider creating prior to retirement:
- Last will and testament – for your wishes after you pass
- Living will – this contains your wishes for healthcare in an emergency
- Trusts – financial wishes setup for after your passing
- Payable On Death (POD) – the triggered transfer of a savings account upon your death
You may not need all of these, but having your wishes in writing, will mean that they are met. Legally, having all of your wishes outlined means less worry for those that you leave. You can also use this planning to remove as much of their tax burden as possible, and cool possible arguments concerning your estate after you die.