You Invest On Your Own
Many investors believe they will save money by handling their retirement investing on their own. But do-it-yourself investors rarely have the time or the expertise to find the best funds or understand the market cycles that are part of stock market investing. As a result, they are more likely to reduce their returns by investing when prices are high and cashing out when prices fall.
Dave recommends you work with an experienced investing professional you can trust to help you choose funds and keep your plan on track.
A 10% Savings Rate Example
Now lets see what happens if instead of saving 15%, you save 10%. Heres the chart:
Notice that you still get the benefit of compounding. Thats because the benefits of compounding depend on how long you invest and what return you earn. But of course, the more you invest, the more you end up with.
In this case, at a 10% savings rate, you end up with about $1.3 million in todays dollars. This is not enough to withdraw an amount equal to 80% of your pre-retirement income.
You may get Social Security benefits to make up some of this shortfall. But Dave Ramseys view is we shouldnt count on Social Security. While Im not as pessimistic on this point, ignoring Social Security in your retirement assumptions is certainly a conservative approach.
Conventional Wisdom: Invest 15% Of Yearly Income Once You Are Out Of Debt
The content of this website often contains affiliate links and I may be compensated if you buy through those links . Learn more about how we make money. Last edited February 10, 2020
When people talk about their investment plans, one of the first topics that invariably comes up is how much they should be investing.
Should they be investing 5%?
15%?
50% of their income?
Today I thought Id look at the number that comes up most often as being conventional wisdom for most people when it comes to how much to invest 15% of yearly income.
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Consider Other Sources Of Income While Retired
There are multiple savings vehicles and income streams to consider for retirement. These can affect how much you need to save today, depending on which sources of income are available to you.
Social Security benefits are offered to retirees aged 62 or older , who have earned enough credits throughout their career in order to qualify for the program. This can provide a steady income stream in retirement. For example, someone born in 1970 who earns $60,000 per year can retire at age 67 with $1,999.00 in monthly Social Security benefits. That’s nearly $24,000 per year that your retirement savings will not need to cover.
A pension plan can also provide you with a steady, monthly income stream. If your employer has one, you’ll need to ask if you qualify, how much income this will offer, and what the pension requirements are.
Annuities are another retirement income source to consider. They’re offered by insurance companies and act as a long-term investment vehicle. After purchasing an annuity either with a lump sum or periodic purchase payments you will receive regular payments over the course of your retirement.
There are other plans and investment options available, but these five are the most common among retirees.
Stocks For A Reliable Source Of Passive Income During Retirement
Written by Jed Lloren at The Motley Fool Canada
Investing in dividend stocks will allow you to maintain a steady source of income during retirement. Its estimated that less than 40% of employed Canadians will get a pension during retirement. If youre in the majority thats expected to retire without a pension, then its even more important that you find ways to sustain your lifestyle once you retire. However, investing in dividend stocks doesnt come down to finding stocks with the highest yield. Theres a lot more that goes into it.
In this article, Ill discuss three stocks that could provide a reliable source of passive income during retirement.
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The Matching Contribution Bonus
For people who start saving early and take advantage of employer-sponsored plans, such as 401s, hitting savings goals isnt as daunting as it may sound. Employer matching contributions could significantly reduce what you need to save per month. These contributions are made pre-tax and it’s the equivalent of “free money.”
Say you save 3% of your income during a year and your company matches that 3% in your 401, “you will make a 100% return on the amount you saved that year,” says Kirk Chisholm, wealth manager at Innovative Advisory Group in Lexington, Mass.
Build A Savings Goal Into Your Budget
Its one thing to throw money at retirement accounts in random spurts. Its quite another to save consistently every month over a long period of time.
In order to guarantee youre always saving money, build your budget around a specific savings goal, one that ensures youll hit your retirement planning goals. Treat this savings goal like a fixed expense. In other words, if your budget doesnt match up with your income, adjust variable expenses, such as groceries or entertainment, before you touch your savings goal.
Building a saving goal into your budget is more proactive than the more common leftover approach: spend money for a month, then put whatever is leftover into savings. This loose approach to saving money almost never works, as the temptation to spend almost always trumps the goal of saving money.
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How Much Do I Need In Dividends To Retire
The amount of dividend income you need to retire depends on your expenses.
To retire, you need enough income to pay for all your expenses.
In my case, I require at least $1,500 per month to cover the cost of my expenses. Ideally, I want at least $2,000 to have extra spending money.
So, to live off dividends, I need at least $1,500 to $2,000 per month in dividend income.
To reach a dividend income retirement sooner, I can either increase my dividend income by saving more money, or I can lower my monthly expenses.
As soon as your dividend income exceeds your annual expenses, you have reached the dividend crossover point. You are essentially financially independent at this point.
What Should I Invest In
Once youve decided on how much you want to invest, the next step is to decide on what types of investments you should be holding. What to invest in will vary greatly on your situation, but heres what we would do:
- Company 401k or other plan up to the match
- Roth IRA for you and your spouse
- Back to the 401k or other plan
When choosing what types of funds to invest in I would highly recommend doing your research first, however, for us we prefer investing in low cost index and retirement target funds through companies like Vanguard where the costs remain low .
If you want an option that costs a tiny bit more than DIY, but is less work, Betterment or Wealthfront may be good options .
What do you think? Will 15% be enough for your retirement? Do you think you should save more or less?
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Choosing Health Insurance Bills Or Your 401
If you cant afford to pay your monthly bills, you cant afford to make 401 contributions. If there are unexpected expenses or loss of income, you may even need to withdraw retirement money early. If possible, focus on putting in the minimum to get your employers match, then use the additional money to pay off any high-interest debt, like credit cards.
One option, if youre struggling to afford your 401 contributions, is to choose a cheaper health insurance plan. People who overpay for health insurance are 23% more likely to forgo their employers retirement match, a TIAA Institute study found.
A health savings account can help you reduce health costs and save for retirement at the same time. You can only fund one if you have a high-deductible health plan, which often leads to higher out-of-pocket costs. You fund an HSA with pre-tax money. When you spend it on Internal Revenue Service -approved qualified medical expenses, your distributions for those are also tax-free and penalty-free.
An HSA is a good supplement to your 401 contributions because if you have unused money in the account when you turn 65, you can withdraw it without penalty for any purpose, though youll owe income taxes for distributions made for non-qualified medical expenses.
Buy A Variable Annuity With A Lifetime Income Rider
A variable annuity is not the same type of investment as an immediate annuity. In a variable annuity, your money goes into a portfolio of assets that you choose. You participate in the gains and losses of those investments, but you can add guarantees called riders for an additional fee. Think of a rider like an umbrellayou may not need it, but it is there to protect you in a worst-case scenario.
Riders that provide income go by many names, including living benefit riders, guaranteed withdrawal benefits, lifetime minimum income riders, etc. Each has a different formula that determines the type of guarantee they provide.
Variable annuities are complex, and many people who offer them dont have a good grasp of what the product does or doesnt do. Riders have fees and frequently have variable annuities that total about 3% to 4% a year. That means to make any money, the investments have to earn back the fees and more.
Put a lot of thought into the process before deciding e if you should insure some of your income. You should figure out what account to purchase the annuity in , how the income will be taxed when you use it, and what happens to the annuity upon your death.
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If You Start At Age :
- With a 4% rate of return, you need to earn $155,086 per year and save $1,938.57 per month contributions)
- With a 6% rate of return, you need to earn $114,867 per year and save $1,435.83 per month
- With an 8% rate of return, you need to earn $83,563 per year and save $1,044.53 per month
For context, the average American’s 401 plan grew at a compound annual average rate of 14.2% between 2010 and 2016, according to a study of more than 6 million accounts by the Employee Benefit Research Institute, a nonprofit based in Washington, D.C. Of course, there’s no guarantee of similar growth in the future.
Keep in mind that these numbers don’t take into account the many ups and downs you may experience over your lifetime, including periods of unemployment or sudden financial windfalls or losses.
It’s also important to consider how pay increases will affect your savings over time. If you consistently put away 15% of your income, the actual amount you contribute each month will grow as your salary rises, which can help you build up your retirement fund more quickly.
And while it may be difficult to save 15% of your earnings when you only make around $30,000 or $40,000 a year, remember that you can work your way up. Save what you can now and increase your contributions as your salary rises. That may mean eventually putting away more than 15% of your salary later to make up for lost time.
The Benchmarks For Those Closer To Retirement
The range gets wider as you get older, so we also provide more detailed estimates for people approaching retirement. This helps someone find a realistic target based on income and marital status, which affect Social Security benefits.
A Closer Look at Savings Benchmarks Later in Your Career
Savings Benchmarks Later in Your Career| 11x | 14x |
Assumptions: See Savings Benchmarks by AgeAs a Multiple of Income above. Dual income means that one spouse generates 75% of the income that the other spouse earns.
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What About Social Security
While the government assures us that Social Security benefits will be around when its time to retire, its best not to rely too heavily on others when planning how to live out some of the most vulnerable years of our lives.
Remember that the average retirement benefit for a retired worker in June 2021 was $1,555, according to the Social Security Administration. Although the payout increases with inflation each year, it’s still unlikely to be a princely sum. In other words, its best to be ultraconservative and not rely on it as the main element of your retirement income.
Mathematically 10% Just Isnt Enough
Basic high school math tells us that saving only 10% of your income isnt enough to retire. Lets take a salary of around $48,000 and the rule of 20 retirement savings amount of roughly $960,000 and look at it in a different way. By saving 10%, your money would need to grow at a rate of 6.7% a year for you to retire 40 years from when you start. In order to retire early, after 30 years of contributing, you would need an unrealistically high rate of return of 10.3%.
The same problem applies to people in their 30s or older who dont have 40 years left before retirement. In these situations not only do you need to contribute more than 10%, but you also need to double it to have a $960,000 nest egg in 30 years.
For 30-year-olds, moving from a 5% savings rate to a 10% savings rate adds nine additional years of retirement income,” says Craig L. Israelsen, Ph.D., designer of the 7Twelve Portfolio in Springville, Utah.
Israelsen adds:
Moving from 10% to 15% adds nine more years. Moving from 15% to 20% adds eight more years. In general, adding an additional 5% to your savings rate lengthens your retirement portfolios longevity by nearly a decade. For 40-year-olds, add another 5% savings chunk and you get about six more years of retirement income. For 50-year-olds, add another 5% savings chunk and you get about three more years of retirement income.
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Estimate Future Income Needs
Fair warning: This step involves the most work but power through, because the others are a breeze. And if you keep even a loose budget, you already have a leg up. Projecting future income requirements begins by taking a look at current spending.
To do that, enter your typical monthly expenses in the first column of a spreadsheet or jot them on a piece of paper. Then do a little thinking about whether each expense will stay the same, go down, go up or best of all disappear in retirement. In a second column, write your best guess of what each expense will be in retirement.
Add those up, tack on other things you may not budget for now but want to spend money on later travel, golf, mahjong supplies, ballroom dance lessons and you will have a rough idea of your monthly spending needs in the future. Multiply by 12 to get the income youll need each year to meet those expenses in retirement. Compare that to your current income to arrive at whats called a replacement ratio, or how much of your income you should aim to replace in retirement.
How Much Should You Save For Retirement
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Its the million-dollar question literally: How much should I save for retirement?
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Tax Shelter Until Retirement
Another advantage of investing in an RRSP is the tax-free money growth. While taxes are inevitable when the time to withdraw the funds comes, your marginal tax bracket should be lower after retirement. Remember that as long as you dont make any withdrawals, all interest, dividends, and capital gains in your RRSP are tax-sheltered.
Investing Tips For Retired Canadians
By Jonathan Chevreau on July 30, 2018
What you should, and shouldn’t do to avoid ‘pre-retirement financial stress syndrome,’ according to one author
When it comes to deploying an investor toolkit for retirement income, Id point near-retirees and retirees to a book recently published by Toronto-based investment counsellor Patrick McKeough. The book, titled Pat McKeoughs Successful Investor Toolkit, is a distillation of McKeoughs long investment career, honed first at The Investment Reporter, and in recent years his own firm, The Successful Investor.
McKeough is definitely a stock guy and is not keen on bonds, even for retirees, particularly at these still low-interest rates. Whether youre a mid-career investor still building wealth or starting to draw down on your portfolio, McKeough is consistent: he pounds the table for a conservative portfolio of quality dividend-paying stocks spread among the five major economic sectors . And, he never fails to remind you, steer clear of stocks in the crosshairs of what he calls the broker/media limelight.
After all, long-term studies show that the stock market as a whole produces total pre-tax annual returns of 8 to 10%, or 6% after inflation, McKeough writes.
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