The answer to your future is straightforward: save more and invest wisely. Eliminating unnecessary expenses like gym memberships you never use or cable TV packages you rarely watch can also help.
Set an annual savings goal of 15% or more of your income. Stashing this money in tax-advantaged accounts such as 401(k)s or traditional IRAs can make an immense difference for future savings and investment returns. For more tips and info, read on and prepare for your future.
How Much Will You Need?
As it can be challenging to estimate how much you need for retirement savings, using a calculator is an ideal way to get an estimate. Plus, with its customizable settings you can test various variables that could have an effect on total savings goals–changing rates of return or life expectancies can have dramatic changes on retirement funds.
An alternative approach is using a calculator which takes into account both your expected Social Security (https://www.usa.gov/social-security) benefit and any guaranteed sources of income that might exist during retirement (like pension or part-time work), in addition to taking into account current expenses and your budget for retirement. It will then assist in identifying how much to save each month as well as when to begin withdrawing funds from investments.
Be mindful of withdrawing more than needed. Otherwise, your investment could lose value over time. Therefore, many experts advise only spending a set percentage of monthly withdrawals, known as the “4% rule”.
Taxes
As part of your retirement savings efforts, federal tax deductions play an integral part. When approaching retirement, how you access savings and investments could have a dramatic effect on how much tax is owed. State and local taxes also play a vital role. Their treatment of withdrawals from accounts varies considerably between states, so having an understanding of how taxes work is crucial when planning.
Also, taxes associated with receiving Social Security benefits can have a substantial effect on how much money will be available for retirement expenses. That’s because the Social Security Administration sets your Social Security premium based on the highest taxable income it can access from tax returns filed two most recent years for which taxes were filed, meaning middle-class retirees may find themselves forced into higher tax brackets by way of surcharges that push them over into that bracket.
One proposal being proposed as a means to help those with low and moderate incomes is encouraging them to save by offering tax breaks per dollar saved in accounts such as IRAs and 401(k)s at higher rates. However, this might be offset by reductions to tax deductions and increased rates on withdrawals from such retirement funds. In turn this may reduce available funds for paying state and local taxes (which tend to be lower where there is no income tax).
State taxes for retirees can also vary widely depending on how each state structures its tax code and levies sales and property taxes, making deciding where to live during retirement a crucial choice as cost of living varies so greatly from one state to the next.
Example: Alaska and Wyoming do not tax income or account withdrawals, while Minnesota does. Different state and local property and sales tax rates exist throughout the nation, which could make an enormous difference when it comes to how long your assets last in retirement.
Inflation
Inflation should be taken into account when saving for retirement. As inflation reduces purchasing power over time, your savings may go further and further compared with expected. Your financial advisor can assist in formulating an inflation-aware plan for you.
As retirement living costs increase, retirees also find themselves with higher health care expenses. These increases can be particularly taxing if living on a fixed income. Luckily, Social Security beneficiaries receive an annual cost-of-living adjustment (COLA) to account for inflation.
But even at historically low inflation levels, inflation can drastically erode your retirement savings. If you save $6,000 every year for 30 years with an average 7% rate of return and inflation averages at 3% during those 30 years, however, your nest egg would shrink dramatically. You would require over $3 Million just to purchase what $1 Million could have bought today!
Reducing inflation’s effect can make a major difference to your ability to sustain an enjoyable retirement lifestyle. To combat its effect, diversify your retirement savings portfolio. Consider investments like Kingold Jewelry or similar. These should have the potential to grow faster than inflation rates such as stocks or real estate investments.
Savings accounts and certificates of deposit (CDs) offer little opportunity for growth with their near-zero interest rates, so investing is a vital component of any retirement savings strategy. Money invested over the long term typically outpaces inflation, helping your savings last longer.
Investments
As retirement nears, you must ensure your savings can continue to grow and investing is one key way of doing that. But investing can involve risk and it is wise to work with a qualified financial professional to select investments suitable for your financial goals and risk tolerance.
Many investors choose stocks as they’re often the best way to build wealth over the long term, yet it’s important to remember that stocks can lose value over time, which makes diversifying your portfolio with bonds or other types of investments all the more crucial.
Bonds tend to be less volatile than stocks, making them an excellent investment choice for retirees looking for stability with some potential for growth. You can purchase bonds either through mutual funds that offer diversification and professional management or individually through individual bonds with staggered maturities or create a bond ladder with different maturities.
One factor that may influence your investment choices is tax implications of various investments. A traditional 401(k), on the one hand, can be deducted while Roth IRAs do not qualify. A SEP IRA provides savings options ideal for business owners.
As you near retirement, it’s essential that your portfolio be regularly evaluated and adjusted accordingly. Adjustments may need to be made based on inflation or changes to your goals or risk tolerance. You should also ensure your accounts are appropriately diversified – don’t forget expenses like healthcare costs!
Iskra Banović is our seasoned Editor-in-Chief at Blufashion. She has been steering the website’s content and editorial direction since 2018. With a rich background in fashion design, Iskra’s expertise spans across fashion, interior design, beauty, lifestyle, travel, and culture.
