Saving for retirement is one of my goals for this year that I’m making progress on. I know that I’m getting a late start, but I have a bit of a cushion because I do expect to receive a pension upon retirement. However, my pension alone isn’t enough. And, according to an MSN article, I’m not the only one who may be a bit short come retirement. Not only that, the MSN article makes a point that $1,000,000 may not even be enough to retire on in some instances. Here’s the skinny on why a million may not be enough:
- Once you begin drawing on your retirement accounts (401K, IRA’s, mutual funds, etc.) you have to pay taxes
- The rule of thumb is to pull only 4% of your retirement savings. Depending on your cost of living at retirement, that figure may not be enough.
- Seniors today are still paying off their mortgage (a huge drain on retirement funds)
- Health care costs can be higher than expected
If retirement is still twenty or more years from now, like it is for me, there are some ways to minimize retirement costs and boost retirement savings. First, boosting savings is critical to make sure that retirement funds are well padded. The first step is to create a budget (almost always the first step to increasing savings and/or cutting expenses). This year, I’m working on saving 12% of my income with 5% allocated to retirement. This figure will have to increase within the next 5 years so I can save at least 10-12% of my income just for retirement. I’m predicting the missing 5-7% will come from additional income (ie. a raise or increase in passive income). Currently, my retirement savings are deposited into a higher return account, like a mutual fund. Once I increase my retirement amount to 10-12%, the additional 5-7% will be allocated to a 403(b) in my case (the equivalent to a 401K). To summarize boosting my retirement savings, this is what it will/or does look like:
- 5% currently deposited into a mutual fund
- 6% currently deposited into my pension plan plus an employer match
- 5-7% to be deposited into a 403(b) in the near future
I’m counting my pension plan in my summary here but I don’t have any control over the allocated amount, so I don’t count it in my total 10-12% figure.
Next, I need to make sure that my expenses are greatly reduced come retirement. Since the MSN article mentioned that mortgage payments are taking a big bite out of retiree’s funds, my number one goal is to be mortgage and/or rent free. Since I don’t own a house yet, I have a couple of options; A.) purchase a house and pay it off before retirement by making additional mortgage payments, B.) find alternative ways to live rent/mortgage free such as building a tiny house, or C.) live cooperatively with other family members and friends (my husband would be dead set against this) to minimize housing costs.
Health care expenses also seem to make or break a retirement account. I feel I have some control over my health by eating healthy, exercising, and taking preventative measures to stay fit and agile. Of course, there’s always the unforeseen disease that I can’t control. Making sure I have access to affordable healthcare will hopefully reduce expenses.
Finally, eliminating excessive debt will allow me to live off 4% of my retirement savings each year. Paying off student loans and any credit card debt (thankfully I don’t have any credit card debt now) a few years before retirement will be essential to making that money last.
My goals for reducing expenses before retirement are as follows:
- Be mortgage and/or rent free
- Stay fit and healthy (eat right and exercise!)
- Pay down all debt a few years before retirement
If I were to create a time line of events for my retirement path, it would look like this:
Save 5% toward retirement in 2011 => keep saving! => purchase or build a house by 2014 => keep saving! => increase retirement savings by an additional 5-7% by 2016=> pay off student loans (this is my only debt right now) by 2021 => keep saving! => increase mortgage payments to be mortgage free by 2031 => keep saving! => retire by 2036
That looks doable!
I love timelines. Notice, however, I haven’t crunched any numbers. That step will come within the next couple of years. Then my timeline will be more robust!
What does your retirement path look like?