How Should I Invest For Retirement
Financial advisors recommend that your age should guide your retirement investments. When youre younger, choose more aggressive, stock-based investments that may see higher returns. As you get older, shift investments to increasingly conservative, bond-based funds to keep your retirement balance stable.
Your own personal willingness to take on risk should guide how you approach investing for retirement as well. Check out our guide on how to invest for retirement. And if youd prefer to have someone else manage your retirement investments, consider reaching out to a financial advisor or choose a robo-advisor or a target-date fund.
How Much Should You Have Saved
Many financial advisors suggest that you should plan on living off about 80% of your current income after you retire. Thus, if you currently earn $60,000 per year, youll need a big enough retirement account to fund an annual salary of about $48,000 per year for the rest of your retirement. But others recommend saving enough to fund 100% of your current income, figuring that certain expenses like travel and healthcare will actually increase. If you have the means, its always best to over-prepare financially, meaning you should shoot for that 100% figure if youre able.
Imagine you want to draw $60,000 per year from your savings starting at age 55. If your money is uninvested and just sitting in cash, you should plan on saving at least $2.1 million, as that will fund your withdrawals through age 90, according to online retirement calculators. But if you invest your money at a 5% annual return increasing annual withdrawals by 3% to account for inflation youll only need to save about $1.5 million.
Bear in mind that the earlier you retire, the greater the variability there will be in your planning. Investment returns can vary considerably from year to year, and the longer you have to fund your retirement, the more likely that youll encounter an unexpected expense. Retiring at 55 also brings other complicating factors, such as the taxes and penalties that you may face withdrawing from retirement accounts.
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Life Expectancy In Ireland
The increase in life expectancy is higher than ever and this is an amazing outcome of a more modern society with improved healthcare, nutrition, social protection and social care. We can now confidently predict that we will live longer than our parents and grandparents. However, it comes with the added burden of planning to have an income to provide for our lifestyles during these years.
Between 1960 and 2019 data reveals that life expectancy has increased by an average of 12.5 years. This jump in our life expectancy needs to be budgeted for. While the State will provide a basic income for all retired people in the form of the State pension, generally this will not be enough to provide for the cost of living. At 253.30 per week, it is designed to be a basic income to cover fuel, food and essential provisions. It is not designed to match the costs of your usual lifestyle while working. For this reason people take on a private pension plan to supplement this payment. Very often your cost of living can increase in retirement, especially if you plan to travel regularly.
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Average Retirement Income By State
Data released by the U.S. Census Bureau shows the average retirement income in every state. Weve listed the averages for each state based on region. To get a better look at retirement income in the U.S., we also broke down which states have the highest average retirement income and the lowest.
How Is Retirement Income Impacted By Social Security
Your Social Security benefits can help you with your retirement income planning. Monthly benefits depend on how much money you made in your lifetime and paid into the system. If you wait until full retirement age to collect, you get your full benefit amount. You can choose to start receiving Social Security earlier, but your benefits will be reduced. If you put off receiving monthly payments until later, your monthly payout will be larger.
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Your Personal Bottom Line
So after you add it all up, if your total retirement income exceeds your predicted expenses, you probably have “enough” for retirement. It wouldn’t hurt to have more, of course.
But if it looks like you’re going to fall short, you may need to make some adjustments and find ways to increase your income, lower your expenses, or both. For example, you could:
- Work a few more years, if that’s an option
- Boost the portion of your pay that you set aside for retirement
- Adopt a more aggressive investment strategy
- Cut back on unnecessary spending
- Downsize to a smaller, more affordable home
The sooner you do the math, the more time you’ll have to make the numbers work in your favor.
What Lifestyle Do You Want In Retirement
People have different ideas of how they might live when theyve finished working.
The Pensions and Lifetime Savings Association broadly categorises these into 3 retirement living standards:
Minimum geared towards paying for essentials with all your needs covered.
Moderate gives financial security and some flexibility.
Comfortable provides more financial freedom and some luxuries.
How many holidays do you see yourself taking a year? Would you have a car? If so, how often would you want to replace it? And how much home maintenance do you think youll need to do?
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Turning Your Savings Into Retirement Income
Youll need to decide how you want to convert your savings and investments into retirement income. You should start thinking about these things before you retire so you can have a better understanding of what your options are and how much money you may have.
Some options include:
- investing your money in other products, such as stocks or bonds
- withdrawing your savings as cash
You may be able to convert some of your retirement savings into income before you retire. This can help you transition from working to retiring.
Think about your other sources of retirement income before deciding how to use or invest your savings. Your other sources of retirement income can impact the amount of money you receive from government benefits and pensions that are based on your income.
For example, lets say you are a Canadian with a low income and receive the Guaranteed Income Supplement . If you withdraw a large amount of money from an RRSP or an RRIF, then you might not be considered low income for the next year. You may receive a lower GIS payment, or you could no longer be eligible for the GIS in that year.
If you think you may earn a low income when you retire and will qualify for the GIS, then a TFSA may be a better savings option for you than an RRSP.
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What About Taxes And Penalties
Retirement funds are generally meant to be accessed at age 59 ½ or later. If you take money out of an IRA before age 59 ½, for example, youll owe a 10% early withdrawal penalty on top of the ordinary income tax youll pay on the distribution. Although Roth IRAs allow qualifying tax-free withdrawals, youll still owe the 10% early distribution penalty if you take money out before age 59 ½. The same is generally true for 401 plans, but there is an exception that may actually work to your advantage. If you separate from service as early as age 55, you can take penalty-free withdrawals.
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How Long Will A Million Dollars Last In Retirement
Because annuities are a source of guaranteed income, a million dollars could last the rest of your life in retirement. A retiree can live a comfortable retirement. Based on our research, a $1,000,000 annuity will provide between $61,000 and $178,105 each year for the rest of your life, depending on age and timing. This does not include Social Security.
Types Of Retirement Accounts
A retirement account is an investment account that helps you save for retirement. Many people have these accounts through a job, such as a 401 or pension. You can also establish your own investment account and make contributions for future retirement income.
There’s no one-size-fits-all when it comes to planning for retirement. Instead, you want to take the time and figure out the best type of retirement account for your needs.
With that in mind, let’s review the most common types of retirement accounts.
One of the most common retirement accounts is a 401, which is the retirement account often offered by employers. If your job provides one, you’ll receive information on plan eligibility and how to enroll.
401s allow employees to make regular contributions that are tax-deductible to an investment account used for retirement. Many employers offer 401 matching programs whereby an employer sets a pre-determined amount to match employee contributions. For example, the employer might match $.50 for every contributed dollar up to a specified percentage of your income.
If you leave your job before you retire, ask about your 401 with your employer. You might be able to leave it in that employer’s plan or roll it over into a new plan.
Anyone can open an individual retirement account . Unlike a 401, it doesn’t have to be offered through your employer.
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Tips To Achieve Your Financial Goals For Retirement By 55
The circumstances for every individual can create a significant difference in how much you should save in your nest egg by the time you turn 55. However, there are a few general goals that you can follow to achieve your financial goals. They are flexible enough to suit anyone, making them excellent rules to consider for how you might want to set your financial goals for retirement.
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Federal Insurance For Private Pensions
If your company runs into financial problems, you’re likely to still get your pension.
Insures most private-sector defined-benefit pensions. These are plans that typically pay a certain amount each month after you retire. These are single-employer plans. Multi-employer plans have different coverage.
Covers most cash-balance plans. Those are defined-benefit pensions that allow you to take a lump-sum distribution.
Does not cover government and military pensions, 401k plans, IRAs, and certain others.
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Other Sources Of Retirement Income
Home Equity and Real Estate
For some people in certain scenarios, preexisting mortgages and ownership of real estate can be liquidated for disposable income during retirement through a reverse mortgage. A reverse mortgage is just as it is aptly named â a reversing of a mortgage where at the end , ownership of the house is transferred to whoever bought the reverse mortgage. In other words, retirees are paid to live in their homes until a fixed point in the future, where ownership of the home is finally transferred.
A common way to receive income in retirement is through the use of an annuity, which is a fixed sum of periodic cash flows typically distributed for the rest of an annuitant’s life. There are two types of annuities: immediate and deferred. Immediate annuities are upfront premiums paid which release payments from the principal starting as early as the next month. Deferred annuities are annuities with two phases. The first phase is the accumulation or deferral phase, during which a person contributes money to the account . The second phase is the distribution, or annuitization phase, during which a person will receive periodic payments until death. For more information, it may be worth checking out our Annuity Calculator or Annuity Payout Calculator to determine whether annuities could be a viable option for your retirement.
Retirement Savings Confidence By Age
Anxious that you aren’t saving enough for retirement? You’re not alone. As of 2021, there were roughly 60 million active 401 participants, in addition to former employees and retired adults. And while they may be active participants, peoples feelings toward retirement vary widely based on age.
According to the 2022 Investopedia Financial Literacy Study, the majority of adults expect that they will be able to retire. Among those surveyed, 57% of Generation Z and 62% of Millennials expect to retire. Nearly 66% of Generation X have such expectations.
Younger adults, ages 18 to 25, are most optimistic about retiring earlymost of Generation Z believe they will retire by age 57.
Those are rosier numbers than what was found in the 2021 data from Natixis Global Retirement Index, which indicated a majority of adults expected to work longer than expected with about 40% saying it would take a miracle for them to retire comfortably. It is possible that data was impacted by anxieties around COVID-19 related economic instability.
In Investopedias study, not all adults are particularly confident in their understanding of retirement planning. Behind digital currencies and investing, retirement was the third least-understood concept. And retirement was the top personal finance concern for about one-sixth of all those surveyed.
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How To Make More Money With Your Pension
Well, now that youve an idea of the figures involved you need to make sure that your pension is set up to succeed.
The structure of your pension fund is critically important.
Most people who have their money with Irish banks, tied agents and other advisors arent set up to succeed.
Thats because they have a limited array of choice and are investing into contracts with very expensive charges.
Its the equivalent of owning a 4 speed car with a leaking petrol tank.
The best pension plans in Ireland are made of the highest quality components in a low cost structure.
At The Pension Store, we can get you the best of everything by
Its important to do everything you can to maximise your retirement fund and if you want some further reading then there are some valuable tips contained in the article 7 Reasons Why Your Pension Fund Isnt as Big as it Should Be
Book a complimentary consultation directly into my calendar as a company director, self employed professional or company employee and well take it from there.
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How Long Do You Want To Plan For
Obviously you don’t know exactly how long you’ll live, and it’s not a question that many people want to ponder too deeply. But to get a general idea, you should carefully consider your health and life expectancy, using data from the Social Security Administration and your family history. Also consider your tolerance for managing the risk of outliving your assets, access to other resources if you draw down your portfolio , and other factors. This online calculator can help you determine your planning horizon.
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Selling Your Current Home And Buying A Less Expensive One
Selling your home and buying a less expensive one can provide you with extra money in retirement. This is often called downsizing.
You may save money in rent or mortgage payments, or free up some of the money that is invested in your home, by moving into a less expensive home. You may also pay less for utilities such as heating and electricity. However, remember that there are many fees and costs associated with buying and selling a home.
Key Investing And Retirement Definitions
401: This is a plan for retirement savings that companies offer employees. A 401 plan gives employees a tax break on money they contribute. Contributions are automatically withdrawn from employee paychecks and invested in funds of the employees choosing .
Compound interest: The interest you earn on both your original deposit and on the interest that original deposit earns. For example, a $1,000 investment earning 6% compounded annually could become roughly $4,300 in 25 years.
Contribution limits: The IRS puts limits on the amount of money that can be contributed to 401s and IRAs each year. These limits sometimes change from year to year.
Financial advisor: A financial advisor offers consumers help with managing money. Financial advisors can advise clients on making investments, saving for retirement, and monitoring spending, among other things. A financial advisor can be a professional, or a digital investment management service called a robo-advisor.
IRA: An individual retirement account is a tax-advantaged investment account individuals use for retirement savings.
Income: The money you get from working, investing, or providing goods or services.Inflation: This happens when the price of goods and services increases as time passes. The result is a decrease in purchasing power, or the value of money.
Nest egg: A sum of money you have set aside for the future in this case, retirement.
Returns: The money you earn or lose on an investment.
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How Do Benefits Work And How Can I Qualify
While you work, you pay Social Security taxes. This tax money goes into a trust fund that pays benefits to:
- Those who are currently retired
- To people with disabilities
- To the surviving spouses and children of workers who have died
Each year you work, youll get credits to help you become eligible for benefits when its time for you to retire. Find all the benefits Social Security Administration offers.
There are four main types of benefits that the SSA offers: