6 Steps to Determine Your Target Retirement Date

We’re about to toss out the 2020 calendar and turn our attention to 2021. One aspect of thinking about the future is planning for retirement. Good retirement planning involves actionable steps to get from now to the desired tomorrow. Here are six steps involved in setting a retirement date you can live with::

Step #1: Set Reasonable Income Goals

We would all love to be millionaires in our retirement, but that’s not reality. A practical, doable retirement plan starts with identifying what you really want to be able to spend to have a livable, enjoyable retirement lifestyle. For some that might be $50,000 a year. For others, it might be $300,000 a year. Whatever the number, spend some time pegging your estimated costs. Depending upon how much you already have saved for retirement, that figure is likely to significantly affect your retirement date.

Step #2: Determine Where Your Income Will Come From 

Some people just assume that whatever their employer automatically takes out of their paychecks for retirement contributions will be sufficient for their later years. For the lucky few with defined pension plans, relying on their employer might be enough. But for the rest of us, the exact income sources will matter. Usually that will be a mix of retirement savings, Social Security benefits, and potentially working part-time. The worst surprise would be to reach retirement and then realize that you haven't saved enough and have to go back to working full-time when you would rather not.

Step #3: Estimate the Necessary Savings

This is where time comes into play. Saving early in your life adds more funds for later because there is a lot more time for investment returns to compound. So, saving 10 percent of net income (after taxes) may be fine for someone in their 20s. But if you’re in your 40s, you have less time and may need to save more. Start with pre-tax retirement savings, such as in an IRA or 401K account, since this will cost you less in taxes. Take full advantage of any employer matching contributions since this is free money to you. Next, if your income is low enough to allow it, make post-tax contributions to a Roth IRA, which unlike a traditional IRA has the advantage of avoiding taxation on money you withdraw. (Yearly contribution limits are rather small, however.) These tax-deferred accounts will help shield your retirement nest egg from taxes while it is building up. Once those tax-deferred options have been exhausted, you can still save in a taxable account, but you should be smart about minimizing the tax bite by emphasizing tax-efficient investments such as stock index mutual funds.

Step #4: Take a Look at Your Health 

If your family history is one with a lot of 100-year-olds, there’s a good chance you’re going to live a long time. So your savings plan needs to anticipate that you will need more retirement savings for a longer time window. No one knows for sure how long they have, but with modern medicine people overall are living much longer, well into their 80's on average. Your retirement has to account for this fact if you want to live comfortably. Professors at the University of Pennsylvania have developed this online questionnaire to provide an estimate of life expectancy. This one provides an estimated range, which I think is also helpful.

Step #5: Consider Health Insurance Coverage

Some folks peg an age number to retirement and hope everything just falls into place. But practical issues often get in the way. The most common is health insurance coverage. Folks who retire before they are eligible for Medicare coverage (health insurance for seniors provided by the government generally starting at age 65) may find they are suddenly strapped for medical costs. Then they may need to un-retire in order to afford medical coverage. If you can’t afford good health insurance in early retirement, don’t retire early! Usually the best health insurance plans are the ones provided by employers. Then, at age 65 you can get Medicare. (It’s important to enroll in Medicare at 65 even if you are still on an employer’s health plan in order to avoid late enrollment penalties.) Don't retire early unless you can afford to buy health insurance on your own.

Step #6: Starting Late Is Better Than Not Starting at All 

Starting to save for retirement late is still better than not saving at all. Social Security will not be enough, so don’t assume it will be your safety net without any planning. If you are starting in your 50s, you will have a higher climb and have to save more aggressively, but IRS “catch-up” rules can help. After age 50 you can put more in tax-deferred accounts such as IRAs. You may also have more discretionary income as your major bills could stop, such as mortgage payments and kids’ college tuition. Also, try downsizing your lifestyle. If you have an “empty-nest,” why not move to a smaller (and cheaper) living arrangement? If you Just avoid buying gourmet coffee every morning you can save $868 annually ($4 x 217 working day stops at Starbucks). There are lots of ways to lower costs in order to facilitate incremental retirement contributions.

This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.