Tips to create a retirement plan
If you haven’t yet started saving for retirement, here are some tips to help you on your way.
Other highlights from this webcast
- When should you change your retirement savings plan?
- Choosing the asset allocation for your retirement savings
- Balancing multiple savings goal
- A Roth IRA, a traditional IRA, or both?
- Tax-efficient withdrawals in retirement
Amy Chain: Wendy from California writes in and says, “I don’t have a plan; how do I start?” I think that’s probably a pretty broad question, so why don’t we hone in and let’s assume Wendy is sort of on the earlier stages of retiring. How do we get started thinking about a retirement plan? Christine, you want to kick us off?
Christine Benz: Sure. So, for people who are in the early accumulation phase, you want to keep your eyes on a few key things. One is setting a target savings rate, so figuring out how much of your paycheck you should be setting aside for retirement savings. That’s probably the lynchpin. There will be no more impactful thing that you can do for your plan than set aside enough savings. So, use some sort of an online calculator to help yourself get in the right ball park.
Then take a look at what sort of tax-sheltered retirement savings vehicles you have available to you. For many people, that will be some type of a company-sponsored retirement plan. We all can invest in an IRA, too, as long as we have some earned income. So, make sure that you’re taking a look at those vehicles that give you a few tax benefits for investing in them before moving on to other investment wrappers.
And then, finally, you want to make sure you are in a sensible asset allocation plan relative to your anticipated retirement date. For early accumulators, that does mean the bulk of the portfolio should be in investments that have fairly high return rate potential; and right now, or historically, that has been stocks. So, a young accumulator would certainly want to have upwards of 50%, maybe more like 80%, 90% of his or her portfolio in stocks and then only gradually over time reduce that stock allocation.
Amy Chain: Now Howard is another viewer this evening who wrote in. Howard’s a little later in the retirement savings game. Would our counsel be different if somebody was starting a little bit later toward retirement savings? Maria, you want to take Howard’s question?
Maria Bruno: Yes, so not surprisingly, we’ll probably hear similar themes between Christine and myself this evening; but I would echo everything that Christine had mentioned.
You know, it’s never too late to start saving; and certainly, the earlier you start the better, because the power of compounding is on your side. The reality is if you start later, then you’ll have to rely heavier on the savings.
So, to echo Christine’s point in terms of looking for calculators in terms of guidelines for savings rates, one of the guidelines that we tend to use is to target 12% to 15% of your income, your salary towards retirement. And for someone who’s just starting out, that could be lofty; so, it’s always a good planning practice to stretch yourself and then do an automatic increase every year, for instance. And you can do this through your 401(k) if you’re employed. But, you know, the reality is if you’re starting later, then you probably need to be closer to that 15% if not higher. So, you really need to stretch yourself because you don’t have as long of a time horizon.
But I would certainly echo what Christine said in terms of when you think about asset allocation, if you think about someone who’s retiring today at the age of 65, for instance, you’re probably looking at a good 30 years in terms of a conservative estimate for a retirement horizon. You need to think then, also, well how close are you to that goal, and your time horizon could be pretty lengthy. And equities do, when you think about investing for the long term, the goal is out-pace inflation; and traditionally equities play that role significantly. So, equities do play a role, so I would echo everything Christine said but really just focus on the savings piece of it at that stage.
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