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The prospect of retirement can be attractive or a dread. It depends on how well people planned for their post-career lives — especially when they were young.
Lane Martinsen and Chris Chen discussed their version of Retirement 101: Best planning and saving tips for retirement. They were joined by experts from Experian, “the leading global information services company, providing data and analytical tools.”
Martinsen is a financial advisor and planner, retirement income strategist and 401(k) and IRA rollover specialist at Martinsen Equity Group. Chen is a fiduciary wealth strategist at Insight Financial Strategists.
After decades of work, people have earned a good retirement and the peace of mind that comes with it. If you are not 100 percent confident you’ll have a good retirement, now is the time to start saving.
“Human capital is the ability to work and earn income,” Martinsen said. “At the beginning of your career you have a lot of human capital. As we age, our human capital decreases. Financial capital is your nest egg that works for you.
“We will all reach a point when we no longer want to work,” he said. “When that time comes, you will need to have some financial capital saved up to sustain you. The earlier you start saving for retirement, the easier it is to build up a nice nest egg.”
Chen cautioned that end of work doesn’t mean end of income.
“Retirement is when you are no longer working for a living,” he said. “When that happens, you need other sources of income to live. That is what retirement planning is all about.
“Many people tell me that they will never stop working,” he said. “However, look around you. Look at your grandparents and your grandparents’ generation. There comes a point for everyone when working is no longer a practical alternative. At that point you will need income to have a dignified life.”
The Ask Experian blog emphasizes why saving for retirement is essential to your future.
Retirement on Social Security alone depends on your expenses. If you owe next to nothing, you can live on next to nothing — but it won’t be much fun.
Martinsen said that Social Security “was never intended to be enough” to retire on. It is only supplementary.
“Social Security does not pay a lot,” Chen said. “The maximum monthly full retirement benefit is $2,788. After Medicare withholding of $134, that leaves $2,654 a month.
“If you are collecting the maximum full retirement age benefit of $2,788 a month and your expenses are less than $2,654 a month, than you can live on Social Security alone,” he said.
Such a life is hardly realistic because even those grim numbers are a best-case scenario.
“Most people will collect less than the max,” Chen said. “The average Social Security benefit is $1,407 a month. If your expenses are less, then you can retire on Social Security alone.
“To live on that income assumes that you live in a low-cost area of the country, that your housing is paid for and that you do not have a lot of needs,” he said.
The Experian experts said it is best to have a few different options when saving for retirement, such as a Roth IRA. The Ask Experian blog explains Roth IRAs.
When should you start to save for retirement? What time is it now? The more time you waste getting started, the more compounding on investments you’ll lose.
“The best time to start saving for retirement was at the start of your career,” Martinsen said. “The second-best time is right now.
“The sooner you get started, the more time you have to benefit from the magic of compounding,” he said. “Your nest egg works for you, and it will earn more and more money if you give it the time it needs.”
Chen concurred that the earlier you start to save for retirement the better.
“When you start early, you benefit from the magic of compound growth,” he said. “Dollars saved earlier will grow to larger amounts with more time.
“Think of it as a seed in the ground in the fall that shows nothing until the spring,” Chen said. “Then it grows large at the end of the summer.”
The Ask Experian blog gives the five biggest obstacles to saving money and how to overcome them.
To start to save — emphasize start — for retirement, set aside at least 2 percent per month in net pay. It’s not much but gets you in the habit. Take advantage of free money by contributing up to the match max in your company’s 401(k), 403(b) or thrift saving account.
Chen and Martinsen suggested automatic withdrawals into an IRA or signing up for 401(k)s at work.
The Ask Experian blog reviews three ways you could be hurting your retirement savings.
Assorted retirement calculators available on the internet will give you a rough idea of what you’ll need to save for retirement.
“To accurately answer how much you need for retirement depends on many variables unique to your situation,” Martinsen said. “Two of the key variables would be your age and your desired future retirement income.
“Consumer debt prevents many from adequately saving for retirement,” he said.
Chen gave a four-step approach to calculate retirement needs:
- Figure out how you want to live your life.
- Figure out costs, ongoing and periodical.
- Project these expenses over the long run, including inflation.
- Project your income sources — Social Security, pension and investments.
According to Experian, there are many things to consider when deciding how much to save for retirement. The Ask Experian blog helps to determine those considerations.
Free money offer
A company retirement fund match is free money. If the match is 50 percent, that’s an immediate 50 percent return on your money. Yes, you’ll pay tax upon withdrawal, but the initial 50 percent return more than offsets the tax slice years down the line.
“A match means the company is offering you free money,” Martinsen said. “All you have to do to get it is to contribute a portion of your own money first.
“You should always take advantage of any matching contribution, but I would not contribute beyond the match,” he said. “There are better options.”
The Ask Experian blog helps to explain 401(k)s.
“When you put money into a 401k, an employer match is more money that they put in for you,” Chen said. “It helps your retirement savings grow larger faster.
“Financial planners will tell you: Take the match; don’t leave money on the table,” he said. “Don’t stop at the match. Figure out what you actually need to save.”
Save as much as possible for retirement. If you can do 15 percent, great. Unfortunately, Americans save closer to 3 percent — and too often not anything.
“As a general rule, save 10 to 15 percent of your income, but it would need to be more if you are getting a late start,” Martinsen said.
“Future tax rates are an unknown variable, and there is a very real risk of them increasing,” he said. “Paying taxes now at historically low tax rates on some of your contributions is smart.”
Chen advised people to save as much as they can, knowing that 10 to 20 percent is a tough ask.
“Do you know your needs in retirement?” he said. “If you do, then you can figure out how much to save. Really, it should depend on retirement ambitions. For most people, 10 to 20 percent is a stretch.
“Save as much as feasible given your basic living needs,” Chen said. “Saving for retirement should be viewed as a priority item.”
In traditional IRAs and 401(k)s, upon withdrawal you might pay 25 percent in taxes, Roth IRA deposits have already been taxed, and withdrawals are not taxed. There are annual limits to how much you may deposit.
“This is a big factor that gets over looked,” Martinsen said. “You don’t want to defer taxes on all of your retirement assets. That will cause a tax problem for you in retirement and will guarantee that your Social Security benefits will be taxed.
“Having the optimal amount in tax-deferred accounts and tax-free Roth accounts is important to get right,” he said.
Today or later
The main options are there: Do you want to defer taxes today and pay them later on larger sums of money when taxes are unknown or fund a Roth with money after taxes have already been paid? Chen weighed the choices.
“Picking a traditional plan will reduce your taxes now: Uncle Sam is trying to help you. Let him,” Chen said. “The Roth is not tax free; it is taxed differently. Picking a Roth plan will reduce your taxes in retirement. Many people like that.”
These are his pros and cons:
- If you believe that your retirement income will be equal to or higher than your current income, pick a Roth.
- If you believe that your retirement income will be equal or lower than your current income, pick a traditional plan.
- If you don’t know what your retirement income will be like compared to your current income, check with your certified financial planner.
Talk with a financial advisor or your certified public accountant about retirement planning basics. You are not the retirement expert — especially with ever-changing laws. Talk with those in the know.
“You don’t need to know much about investing, but you do need a trusted advisor who can make sure your investment portfolio is a good fit for you and your risk tolerance,” Martinsen said.
Those in the know
Chen advised not to get into investment weeds where others know better.
“You can start learning the basics by signing up for a compatible blog, or read a book,” he said. “You don’t need to know much about investing. Unless you work in the field, you are never going to be an expert. That’s why you have experts.
“You are not an expert at medicine, dentistry, tax, fixing cars or law,” he said. “Get used to it. Focus on what you are good at. Make a living from it. Hire others to do what you don’t know how to do.”
It’s not the end of the world if you find you are not on track to meet your retirement saving goals.
Circumstances change. Rather than worry, pause and talk with a financial advisor or your CPA to see where you need to adjust savings to get back on track.
“Find a good retirement planner,” Martinsen said. “The difference between a planner and a broker is significant. Comprehensive holistic retirement planners are harder to find, but they can make a world of difference.”
Chen favors fee-only financial planners who can get a plan together.
“A planner would figure out the ways you can reduce your expenses and start saving, how to maximize the value of your savings, and to plan for investing,” he said. “It’s never too late to plan. Failing to plan is planning to fail.”
If you haven’t started to save for retirement or have put aside only a little, your best investment is to talk with an expert — and not a friend or relative. Go with a pro, someone who makes a living at knowing the laws and which way to turn for your benefit.
“Nobody ever reaches retirement age and says, ‘I saved too much, and I have too much money,’” Martinsen said. “However, many people do say the opposite.”
Chen’s final advice was that it’s never too early to start saving.
“Save as much as you can early,” he said. “You will be glad. No one ever told me, ‘I wish I had saved less.’”
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