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3 Steps to Prepare Financially for Retirement

Did you know that less than 50% of American workers have calculated how much they will need during retirement? Not enough Americans are planning and saving for it either.

What Research Shows

In a National Compensation Survey conducted in March 2014 looking at retirement benefits from access to participation and take-up rates, the Bureau of Labor Statistics discovered that only 56% of the American workforce had access to a defined contribution plan such as a 401(k). Of this group, only 38% participated. However, the average American spends roughly 20 years in retirement alone. Clearly this trend fails to plan for the future. Planning for retirement is an essential part of your financial planning and the earlier you start, the better. (For more, see: Saving for Retirement: The Quest for Success.)

Given that your retirement years account for a significant amount of time in your life, effective planning is important. Your company pension plan or Social Security cannot be your sole source of retirement income. In addition, depending upon the industry and type of work, many workers have seen a drop in sponsorship rates from employers between 1999 and 2011, according to an extensive report “Are U.S Workers Ready for Retirement?” conducted at the Schwartz Center for Economic Policy Analysis at the New School. The report draws upon data from the Census Bureau’s Survey of Income and Pension Participation (SIPP).

Retirement Planning Steps

What must you do then to secure your financial future? Your standard of living during your retirement is contingent upon your effective retirement planning. Your skillfulness in planning and investing as well as use of 401(k)s and IRAs (both tax-advantaged savings plans), makes a tremendous difference in your quality of life.

The first step in retirement planning involves figuring out an estimate of how much you will need to put aside. A common assumption has been to allocate 70% of your annual pre-retirement income for the future. This however does not take into account rising costs due to inflation, any medical concerns you may have or planning for additional expenses that you wish to take on such as vacations and the like. It is far better to have more cash put away for your retirement than to find yourself short, unable to do things you care about or to even live life at your prior standards while working full time. (For more, see: Will Your Retirement Income Be Enough?)

There are typically three main sources of retirement income: Social Security, pensions, and annuities and your savings. You can find out how much you can expect to receive from Social Security by estimating roughly 40% of your income prior to retirement. You can use the retirement estimator on the Social Security Administration website www.socialsecurity.gov or call 1-800-772-1213 to help you figure out a close estimate of your benefit.

Next, figure out any annual payouts you expect to receive from an annuity or company pension. Say, for example, you have projected that your retirement expenses surpass your income (pension and Social Security) by $10,000 per year, then you will need to build up a nest egg of at least $150,000 to $200,000 for your retirement period of 20 years, just to account for the gap caused by inflation.

Your third and most important step is to save. Put money into an IRA. You can put up to $5,500 a year into an IRA. You can contribute even more if you are 50 or older. You can also start with much less. IRAs also provide certain tax advantages.

When you open an IRA, you have two options, typically Roth or traditional. In some cases, you are also eligible for a SEP account as well. 

To enjoy your retirement fully, you will certainly want to have money put aside and planned for your living expenses for at least 20 years, the average lifespan of an American in retirement. Plan ahead and be prepared. Then you can enjoy a great retirement doing activities you love with people you care about on your schedule. (For more, see: Determining Your Post-Work Income.)