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Are you saving enough for retirement?

April 04, 2017
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How much to save?

A question many people want an answer for but struggle to figure out: How much should I save for retirement? "As much as you can," is compelling advice. Many financial advisors recommend that you save 10% to 15% of your income for retirement, starting in your 20s.

But that's just a general guideline. I recommend to establish a savings target amongst your retirement plan objectives - one that tells you roughly how much you should set aside over time to meet your retirement goals. You can do this by estimating your future spending and use the projected spending to decide how much income you'll need in the future.

If you’re honest about your cash flow (income come and expenses), a good retirement calculator will give you an assessment of where you stand in your savings progress. Many thorough calculators have assumptions that are based on research programmed into its system. However, for a more comprehensive approach a retirement plan should be on order.

As a general rule, many have expected a 4% withdrawal rate from retirement savings annually. So for example if your projected retirement expenses exceed Social Security and pensions by $20,000 a year, you might need a nest egg of $500,000 to bridge the gap. Each individual’s circumstances vary but this illustrates that retirement savings targets are generally enormous and the sooner you get to saving it the better.

Can't save enough?

Try to divert as much of your earnings into savings as you can. If you don't have a budget, create one. If you do have a budget, revise it to reflect your newly urgent commitment to saving, as well as any changes in your spending since your last outbreak of budget fever. Chip away at wasteful habits - that might mean ditching expensive dinners or unused gym memberships. Putting away an adequate portion of income goes a long way in building a retirement nest egg. By putting money regularly into your retirement savings, you won’t be pressured into making major compromises to your living standards when you approach retirement.

If your savings balance is smaller than it should be, you may be tempted to load up on stocks, in hopes that a pedal-to-the-metal investing strategy will boost the eventual size of your nest egg. Problem is, an overly aggressive approach could also backfire, especially if stocks are pummeled by 50%-or-larger bear-market just as you're on the verge of retiring. An alternative way to go: Put together a mix of stock and bond funds that's aligned to your risk tolerance and time horizon, can give you the most return for the level of risk you're willing to take.

Extending your career can improve your retirement prospects in several ways. The fact that you're able to save more and that the savings you accumulate have more time to grow can significantly boost the size of the nest egg at retirement. As an example If you’re 50 years old and are able to save $1,000 a month and work to age 68 instead of 65, he would enter retirement with an extra $80,000 in retirement savings, roughly $350,000 instead of roughly $270,000. Plus, that larger nest egg would now have to fund two fewer years of retirement.

Reduce the amount you'll need?

The most obvious way is to rethink your standard of living in retirement. Swapping the around-the-world sailing trip for an Alaskan cruise may help you lower your retirement target to a more attainable goal.

Running out of time?

If you find yourself running short on time - say, you're in your 40s or even your 50s, and you haven't gotten started yet - there are still a few things you can do. The key is to do them now.

You should first think about maxing out your contributions to tax-favored retirement accounts like IRAs and 401(k)s. For 2017, the IRS allows $18,000 for a 401(k) ((though your employer may impose lower limits), and $5,500 for traditional and Roth IRAs. If you're over 50, you can contribute additional catch-up contributions. Even the government understands that this is crunch time, and it has devised a few ways to help you out.

For example, workers age 50 and older can put more money into IRAs and workplace retirement plans than younger savers can. That means you can and should contribute an additional $6,000 to a 401(k) and $1,000 to traditional and Roth IRAs. If you're arriving late to retirement planning, a traditional IRA may be a better choice than a Roth.

Consider other alternatives that can reduce how much you need to save. The most obvious one: Think about delaying retirement by a few years. That strategy will allow you make more contributions to your retirement accounts while postponing withdrawals - which could significantly increase the size of your nest egg even as it reduces the amount you need to accumulate to make it through retirement.

Getting a part-time job after you retire also can make a big financial difference - and can provide mental, physical and emotional benefits as well. Other options include trading down to a less-expensive home (you can invest the profits toward retirement), reining in your spending or transforming the equity in your home into income by taking out a reverse mortgage - though high costs mean this last option is a good idea for only a small number of retirees.

When can to retire?

Trying to figure out whether you can afford to retire is like putting together pieces of a financial jigsaw puzzle. First, you need to estimate how much you'll spend in retirement. Then you must consider the income you'll collect in retirement from pensions and Social Security - as well as the amount you can afford to draw from your personal savings or other sources.

The idea is to assemble the various pieces, and then see whether the picture of retirement life that emerges is acceptable to you.

To help bring the retirement picture into better focus, try meeting with an experienced Financial Advisor who can help to guide you on a secure path to retirement. At Guidant Planning, we can make the task easier for you. Just give us a call at (800) 332-8552. We would be happy to answer your questions on retirement planning, savings and investment, and discuss our services with you.

**Some information in this article is from NerdWallet, Inc. and Cable News Network. A Time Warner Company.**

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