Key Considerations When Saving for Retirement

Retirement should be a time to relax after years of giving so much to a career. It shouldn’t be a time to worry about money. Careful retirement planning now, no matter how young or old you are, will allow you to focus on the good life later. Here are some key considerations to think about as you save for retirement.

Medicare is intended to help older Americans navigate healthcare expenses but, unfortunately, it doesn’t cover everything. Furthermore, healthier retirees generally live longer, which means you could be paying for healthcare for a couple of decades or more after you retire. Many people purchase third-party insurance to supplement Medicare which should be accounted for now as you estimate how much you’ll need for retirement.

Cost of living inevitably will increase and some things such as food, rent, and entertainment might be more expensive by the time you retire. Be sure to factor in extra savings to cover the difference.

Just because you aren’t earning a paycheck for full-time work after retirement doesn’t mean you won’t be paying taxes. Disbursements from a 401(k) or traditional IRA are taxed, and even your Social Security benefits will be taxed if you’re earning a certain amount from other sources (e.g., retirement savings, a part-time job). Also, if you own a home, you’ll still need to pay property taxes. Therefore, taxes must be included with any estimate you make for retirement expenses. Consult your tax advisor for more information about your particular tax situation.

The last thing you want to worry about in retirement is a huge credit card balance or big car payment. Work on reducing or eliminating that debt now and if you foresee some debt carrying over into retirement, factor that into your estimates. A monthly rent or mortgage payment is another expense to consider – in the Bay Area, we know that could be a significant expense. If you own your home and still have a mortgage, continually evaluate your refinance options so you can enter retirement with a low interest rate and a manageable payment.

Interest is a wonderful thing when your money is working for you. Saving now for a retirement that might be 20, 30, or even 40 years away requires patience. Compound interest is the reward for that patience. Essentially, compound interest is the interest earned on previous interest. So the interest you earn this year will collect more interest next year, and the year after, and so on. After many years, even a small contribution grows without you doing a thing, which is why beginning to save when you’re younger is so important.

Investing in a 401(k) or IRA (or both) is a great way to save for retirement because your savings and earnings could exponentially grow over time. When you’re younger, think about making your money work harder by being more aggressive with your allocations in higher-yield funds. Even a moderate return now can balloon your account in a few decades. You can always adjust your allocations toward something more conservative as you near retirement. We recommend consulting with an investment advisor to be sure your allocations are in line with your long-term retirement planning.

People often think of retirement as a time they and possibly a spouse or partner devote all the savings they’ve built up over the years to just themselves. However, you may need to help support other family members. If you are an older parent of a teenager, your retirement might coincide with that child attending college or grad school. Children or grandchildren might have additional needs you’ll want to help with. And retired siblings or even parents might require assistance with medical and living expenses. Be sure to budget for anything that is important to you that goes beyond cost of living.

Retirement savings and investments are most productive when you don’t touch them until you retire. Withdrawing or borrowing money from a 401(k) or IRA may be tempting when you really need cash but you’ll possibly incur penalties and taxes that can negate any savings growth. Even a penalty-free benefit of withdrawing money as a first-time homebuyer (which might make sense in some instances) prevents that money from compounding in the long run. Draw from your retirement savings only as a last resort and only after carefully doing the math. Other options, from refinancing an existing loan to obtaining a home equity loan or personal loan, are available for people with good credit who need cash at affordable rates.

When money is tight the first thing you might cut from your budget is retirement savings. A temporary break now can cost you thousands of dollars in the long run. Strive to keep contributing, even if it’s just a little every month. A partner such as 1st United can help you sort out your finances and find those few extra dollars that you can put toward your future. Contact us today to learn more.