Don’t rely on wishing and hoping your finances will magically be where they need to be for you to retire comfortably. Some easy planning now can prevent stress in the future.
“He who fails to plan is planning to fail.”
– Winston Churchill
That quote could not have a more striking relevance to this article if it were a meat dress at a Lady Gaga concert. By refusing to take the time to plan your retirement, you’re begging to work until you’re 85. Don’t beg for such a terrible fate; set yourself up for success by planning your retirement now. Social Security benefits aren’t stable enough to rely on and won’t be enough on their own, and a company 401(k) isn’t likely to get you to your retirement goal, either. Figure out how much you should be saving, and where you should be saving it.
How Much Will You Need?
Should you save 10% of your income? 15%? 20%? Do you need 8x your annual income in retirement? 25x? 50x? Understanding what your retirement goals are can help you determine how much you need to save.
Manage Your Means (MYM) recommends a lofty retirement goal of 25x your annual income. So, if you make $70,000 annually, your retirement goal should be $1.75 million. This will allow you to withdraw your annual income at 4% per year, which is a pretty safe withdrawal rate. In most cases, this amount of savings will allow you withdraw forever without going broke.
This isn’t possible for everyone, especially if you’re starting later in life. Can you get by on less in retirement? Absolutely! You just won’t have an infinite pile of interest-earning money working for you – your stash will decrease over the years of retirement.
Safest Places to Store Your Stash
401(k)
If your employer matches or partial-matches, your primary retirement investment dollars should go towards maximizing the benefits of employer matching. Don’t go above employer matching levels, though – you’ve got better places to put your money that aren’t nearly as restrictive.
Individual Retirement Accounts (IRAs)
Choosing between a traditional or a Roth IRA can be tricky, but both are great ways to bolster your retirement savings. Always choose to save for retirement in a tax advantaged account rather than an ordinary brokerage or savings account.
Health Savings Account (HSA)
What? Health Savings Account? What is this doing in the retirement section? No, it’s not a boneheaded mistake. Really! HSAs are an amazing retirement tool. Money you invest is pre-tax, you are allowed to invest in a set of mutual funds similar to a 401(k) plan, and they effectively turn into a traditional IRA at 65. Before 65, you can take tax-free distributions to pay for any eligible medical expense. It seems unconventional, but investing heavily in your HSA is a great retirement option.
Employee Stock Purchase Plan (ESPP)
While this isn’t technically a retirement account in that it doesn’t have a tax advantage, if your company offers an ESPP, you should try to participate in it to enhance your retirement buying power. Here’s an example of how a standard ESPP can work to improve your retirement:
Your company announces a new ESPP investment period from January 1 – July 1 (6 months). You agree to sign up, contributing $50 after-tax dollars per paycheck into the plan. After 6 months, you’ve contributed $600 – way to go, stud! The plan looks at the stock price of your company on the opening day (January 1) and the closing day (July 1) of the period. On January 1, the price was $80. Now it’s July 1, and your stock is worth $95. Your company purchases $600 worth of stock for you at the lower of the two prices, minus 10%. So, $80 – 10% = $72. You bought your company stock for $72 per share, except it’s now worth $95. Your $600 just instantly – well, over 6 months – got a 31.9% increase and is now worth $791.66. You can immediately sell that company stock and invest it in a Roth IRA, with an enormous increase to your buying power.
What It All Comes Down To
Taking a little bit of time today to plan ahead can prevent a lot of worry later on, and maybe even let you retire earlier than you expected! This post is about retirement, but life is about living, make sure you balance living now versus living in retirement. If you have other ways to Manage Your Means for retirement, tell me about it in the comments!
– Sam
Manage Your Means 