Retirement for the Average Joe

It’s my pleasure to present this guest post by Courtney of Your Average Dough. While strolling around the internet I came across Courtney and her site. She puts out good stuff and I like how she writes, so I asked if she’d be willing to write for Money is not Taboo. Yeppers was her reply, so here’s her first piece. I hope you like it, (I know I do) and maybe we’ll get lucky and have more posts from her in the future.  Shin

Courtney, Your Average Dough

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Retirement

Depending on your age the word retirement may mean different things. If you are younger, you may not care or even think about retirement. When we ask some of our friends about retirement, most of them say they aren’t thinking about it yet because it’s too far away. If you are older and approaching the golden years, retirement likely has a completely different meaning.

For those of you who are closer to retiring or for those of you who are trying to retire early, the word retirement is very important. The funny thing is, the word retirement should be important for everyone, whether you are just entering the workforce of if you nearing your departure, retirement plays a major role.

The word retirement is simply defined as “ withdrawal from one’s position or occupation or from active working life” according to the Merriam-Webster dictionary. Leaving your job or retiring is the easy part, figuring out how to survive financially without an income stream is the part that most people struggle with. Most people don’t take the time calculate how much money they would need to live on once they retire, and those who do often do it too late.

I try to advise all my friends and readers that it’s never too early to start planning for retirement. Even people who are in college can start to think about retirement. The more you save in your early year the more interest that money can earn and compound to your desired retirement age. I have laid out 5 tips below to help those get on track for your retirement years.

Get Educated and Set Goals

Start learning about the different types of retirement accounts and the advantages and disadvantages to each. For example, should you contribute to a ROTH IRA or a Traditional IRA? How much should you contribute to your companies 401K and what the difference between that and a regular savings account? These are all questions that you can easily research and find online, and many a fellow blogger often discusses these topics in depth.

My quick tip, if your company has a 401K match, you should, at a minimum, contribute the maximum amount the company will match because that is “free money”. By free money, I mean it is money that you don’t have to earn because the company simply matches your contribution to your own account. Most companies these days match 25% up to 100% of your contribution up to a certain limit. Whether its 25% or 100%, those returns are extremely hard to replicate in any type of investment today!

Education doesn’t stop at the type of account. Once you understand the different types of account out there, you need to figure out how much you need/want to have when you retire. Everyone has different lifestyles, so the number will vary on an individual basis.

The key is to figure out the lifestyle you want when you are older and what you will be comfortable living off of for the rest of your life, but keep in mind, if you don’t have another stream of income in your retirement years, those savings have to last you the rest of your life.

Most companies, these days, match 25% up to 100% of your contribution up to a certain limit. Whether its 25% or 100%, those returns are extremely hard to replicate in any type of investment today! Education doesn’t stop at the type of account. Once you understand the different types of account out there, you need to figure out how much you need/want to have when you retire.

Everyone has different lifestyles, so the number will vary on an individual basis. The key is to figure out the lifestyle you want when you are older and what you will be comfortable living off of for the rest of your life, but keep in mind, if you don’t have another stream of income in your retirement years, those savings have to last you the rest of your life.

Once you figured out your number, set goals! Some of my coworkers in the past have told me they want $1.5 to 2 million dollars saved by the time they retire, which is great. However, when I ask them if they have any goals or plans to get to that number they normally say something like “no set goals or plans, but we contribute to our 401Ks each paycheck”.

While contributing is great, if you don’t set goals you don’t know how much you need to contribute or save to reach those goals at the end. So once you figured out your number set and stick to those goals. If you are not a financial person, consult with a financial planner or read some of the great financial blogs that are available today. Now that you are educated, you have your retirement number and your goals are set, we can move on to tip number 2.

Avoid Lifestyle Inflation

Lifestyle inflation is something that happens to most of us and we don’t even know it. Lifestyle inflation has several names, but all it really means is that when you make more you start to spend more. Seem logical right? The problem is when your spending goes up, along with your earnings, your savings amount stays constant.

Rather than increasing your spending when you get a raise or promotion you should increase your retirement savings contributions. Hey, you are still rewarding yourself, you are just deferring the rewards to later in life, nothing wrong with that! Now don’t go crazy on me, I’m not saying don’t treat yourself at all initially.

If you got a promotion or a raise or changed jobs to a higher paying one you should go out and have a nice dinner or celebrate with friends and family, you earned it! But, before you get used to the new income stream, take 50% or more of that increase and put it into a 401K or IRA account so you have it for retirement. The more you save in the earlier years of your career the better off you will be in retirement.

Spend Smart

Spend smart ties into lifestyle inflation. Buying things is unavoidable, you need to spend money to live, that’s just part of life. However, spending smart is very different than just spending. Lets using housing as an example. Everyone should have a roof over their head, whether you own or rent the same principle is true.

You don’t need to have the biggest house on the block or the apartment with the skyline views even if you can afford it. Living below your means is one of the easiest ways to save some extra cash. If you are single and living alone, chances are you don’t need to rent a 1,500 sqft apartment (I know it sounds crazy, but it happens more than people think).

The same is true for homeowners, my husband and I live in a cozy 1,600 sqft house because it was something we could comfortably afford and still have money to save. We could have gone all out and bought a 5 bedroom 3 bath house that had 3,500 sqft, but we choose to live modestly and have more money for savings. In fact, choosing the smaller house saves us just about $3,000 a month!

If that doesn’t seem like a lot try doing that over 30 years which equals $1,080,000. The savings really add up, so if you can make it work, live modestly and below your means, you may not realize it now, but you will be thankful you did when you retire.

Take it to the limit

As the band, the Eagles said, “take it to the limit”. If you want to retire comfortably and or early, you should try to max out your retirement contributions each year. Now, if you are just starting off in your career this may be hard, but over time you should make it a goal to try to max out your retirement contributions when possible. The standard limit in 2016 for 401Ks was $18,000 per person and $5,500 for Roth and traditional IRA’s.

There are more rules with phase-out limits and like, so I suggest you take a read through this IRS website. Taking your contributions to the limit will help you achieve and maybe even surpass your retirement goals (and there is nothing wrong with having a little extra money in retirement right?). Truly, the savings really do matter. Take a look at this 401K calculator to see how the changes in savings rate will translate into a significantly better retirement number.

The chart below is shocking, maxing out your contributions will help you avoid these types of situations.

Note: Retirement account savings include 401(k)s, IRAs, and Keogh plans.

Source: EPI analysis of  Survey of Consumer Finance data, 2013.

Think Ahead

This last section is one that many people overlook or forget about and it’s especially important for those close to retirement or those planning on retiring early. If you are planning to retire early save 50 or even at age 62, most people will have a gap in their medical coverage.

Medicare eligibility doesn’t kick in until 65, so you will need to find a bridge policy or alternative coverage until 65. With the new presidential administration, the cost of this gap coverage is uncertain, however, what is certain is that not having coverage at all during those years is a huge risk. One accident, or one surgery, without insurance could wipe out most of your retirement savings in one shot. If you are fortunate to have coverage

If you are fortunate to have coverage through a spouse’s job or your former employer then you are all set. If you don’t think that will be an option, starting looking now and pricing out the cost of insurance in your gap years. You will want to know how much that medical insurance will cost in the gap years so you can build that into your retirement goals. If you plan for it early enough you won’t have to tap into your regular retirement savings to pay for medical insurance.

Thinking ahead can save you thousands of dollars later one.

So readers, what do you think? Have you started saving yet? Or do you have any other tips or advice that you would like to share?

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