According to the Social Security Administration, its payments replace only about 40 percent of the average wage earner’s income after retiring. Considering that fact, most people will want to come up with additional income to live comfortably in their golden years.
To help ensure that you’ll have the money you need to enjoy the lifestyle you want, examine your income sources well in advance of your planned retirement date to allow time to adjust. As part of that process, it’s important to develop a realistic picture of the financial resources you may need to determine whether your current retirement plan will support your goals.
Here are simple steps you can take to prepare for a comfortable retirement:
1. Take advantage of tax breaks for retirement savings
In 2020, you can invest as much as $19,500 in a 401(k) account with pre-tax dollars, or as much as $26,000 if you’re 50 or over and are eligible to make catch-up contributions.
You can put the money into a retirement account that’s offered by your employer, such as a 401(k) or 403(b) plan where the money grows tax-free until you withdraw it. You may also put the money into a tax-advantaged retirement account of your own, such as an IRA. IRAs offer similar tax breaks to 401(k)s, though some of the eligibility rules differ. Depending on your income level, you may also be entitled to claim a tax deduction for contributions made to an individual retirement account.
2. Don’t sacrifice your retirement savings for your kids
Many parents sacrifice retirement savings to help cover costs for their children — including education expenses. While it’s noble to try to ease your child’s debt burden, you could end up without the money you need to meet your own expenses in retirement. Student loans can be paid back over a lifetime, and your kids have their entire careers to set themselves up for the future. Also, keep in mind that making withdrawals from retirement accounts to pay college tuition bills can have tax implications and possibly impact the student’s Free Application for Federal Student Aid (FAFSA) calculation.
3. Invest beyond 10%
You may have heard you should save 10% of income for retirement. But this likely isn’t enough. To avoid financial problems that could result from a large shortfall, aim to sock away 15% to 20% of annual pretax income. Also, women, who tend to live longer than men, may need their assets to stretch farther.
4. Plan for unexpected issues
Make sure you don’t overlook risk-management strategies. Studies have shown more than half of retirees left work sooner than expected due to job loss or ill health. It’s also a common misconception that Medicare pays for health care costs in retirement, but relying on it alone can leave seniors with unexpected and burdensome bills.
5. Understand how to maximize Social Security benefits
If you claim Social Security before you’ve worked for 35 years, you'll receive smaller benefits because the Social Security Administration determines your monthly income based on your highest 35 years of earnings, adjusted for inflation. Also, claiming Social Security prior to full retirement age — which is between 65 and 67, depending on your birth year — can also result in a permanent reduction to your monthly check.
Regardless of your time horizon, risk tolerance or savings goals, you can always find the right savings vehicle for your retirement needs at TCU. To assure yourself a better tomorrow, contact the TCU Investment Representative nearest you at tcunet.com/Plan/Investments/Investment-Team.
This article is for educational purposes only and doesn’t constitute tax, legal or accounting advice. Please consult with an attorney or tax professional for guidance.