5 Tips to Afford Retirement

Two of the most common questions people ask themselves as they progress through their career are when to retire and how to afford it. As with most financial considerations, the key is preparing in advance. Below are five helpful tips to be able to afford retirement.

Don’t Rely Only on Social Security Payments

During the course of your career, each paycheck you earn has a deduction for Social Security tax. When you reach age 62, you have the option to begin receiving payments (the amount increases at age 67 and age 70). However, Social Security is an insurance program designed to supplement retirement income, not to replace your pre-retirement earnings. In addition, political and economic factors could affect the amount you’re able to draw, which makes this a risky choice if you plan to use Social Security payments as your primary post-retirement income stream.

Have Roughly 10 Times Your Annual Take-Home Pay Saved

To afford retirement, a general principle to follow is to save approximately 10 times the amount of your annual salary. For example, if you earn an annual salary of $100,000, you should strive to save $1 million in your retirement account or other investment options. That figure may seem daunting, but it emphasizes the importance of saving long before you plan to retire. Many 401(k) plans and IRAs offer models where you can plug in a reasonable amount to save per paycheck and then gauge from there how much it will take to accrue your target amount.

Consider Cost of Health Insurance if You’re Under 65

If you elect to retire before turning 65, it’s important to factor in the cost of health insurance. Since most people don’t qualify for Medicare before turning 65, you won’t have access to health insurance coverage offered by your employer if you retire before that age. That means you will need to determine what it will cost to insure yourself through a privately-run insurance plan.

Pay Off All Debt, Including Your Mortgage

Once you’ve retired, you’re not earning any more paychecks. Your investments will be used to replace that income. It makes financial sense to not be burdened with any outstanding debt. First to consider is credit card debt, but additionally, you should take steps to ensure that your vehicle and your house are paid off in full. Carrying debt will drain your financial resources and make it that much harder to afford retirement.

Try the 4% Rule for Your Monthly Budget During Retirement

As mentioned above, it makes financial sense to start saving for retirement as soon as you can. But once you’ve retired, it’s important to ensure you can live comfortably and not deplete your funds during that period. A commonly used principle is the 4% rule, which is where you add up all of your investments and withdraw 4% of that total during your first year of retirement. In subsequent years, you should adjust the dollar amount you withdraw to account for inflation and cost of living increases.

The ability to afford retirement may seem daunting, especially early in your career. The key is to be proactive, plan in advance, and start saving as soon as you can. The more you do early on, the less pressure you will be under to arrange for adequate funding as you approach retirement age. For more information and details, please visit the Enjoying Retirement section of our website.