Summers are full of family excursions, trips that have been talked about for years and saved for faithfully. Throughout the planning, you keep your eye on the destination, whether it is a beach vacation or a Rocky Mountain camping trip. Finally, after all the planning, scrimping and deliberating, you arrive at your destination.
That's very much like saving for the "destination" of retirement. You need to plan, stay on course and focus on the destination, but the destination is sometimes 20, 30, or even 40 years away! Planning is important, but trying to anticipate retirement expenses and income that far in the future can be a daunting task.
Four Rules for the Road
Rule #1: Choose Your Destination
What type of retirement do you envision? If you plan to stay home and practice your golf swing, you may be able to maintain your standard of living with 80-85% of your pre-retirement income. However, if your vision of retirement includes annual trips to Hawaii or Europe, you may need to plan on maintaining an income roughly equivalent to your working salary. Many experts say you will need to have $15-20 saved for every $1 of retirement income you need from your retirement savings (source: CNNMoney.com). Choose the destination and save with that vision in mind! Retirement Expenses & Income Worksheet
Rule #2: Plan the Route
Planning is essential when preparing for your retirement. You need to begin saving as soon as you are eligible and then plan to raise your deferral annually. Strive to save a total of 15% of your current compensation, which can include your deferral and any matching or profit sharing dollars (Source: Forbes.com). Taking that road should get you to your destination— retirement! Do the calculations and make sure you are contributing enough to secure your financial future.
401(k) Savings Calculator
Annual Dollar Limitations Information
Rule #3: Avoid Traffic Delays & Accidents
Just like on your last road trip, heavy traffic and accident can keep you from getting to where you want to be. Make sure to take full advantage of your employer's retirement plan. The Traditional retirement account allows for tax-deferred growth, while the Roth retirement account that some plans offer can provide you with tax-exempt retirement income! Accidentally neglecting to contribute enough to receive the full match or using your account as an emergency fund could delay your retirement date significantly. Retirement Shortfall Calculator
Rule #4: Use Your Map or GPS
Along the road, market volatility can sometimes cause retirement plan participants to consider major changes, like moving all their dollars to the most conservative option available—the money market. Choose investment options and allocations that match your time horizon and risk tolerance. Market volatility is a normal part of investing, but it should have little influence on a long-term investment strategy. Periods of volatility are not the best time to make big changes to your asset allocations because your emotions can take you down the wrong road. Regardless of the volatility, stay invested and stick to your plan. Risk Tolerance Questionnaire
Just like using a map or GPS can help you reach your destination, following your individual investment strategy can help you stay on course. Spend at least as much time planning for retirement as your do planning your annual vacation. And above all, keep your eye on the destination—a well-funded retirement, full of everything you hoped it would hold!