Estimating Your Retirement Income Needs
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It’s common to discuss desired annual retirement income as a percentage of your current income. Depending on whom you’re talking to, that percentage could be anywhere from 60% to 90%, or even more. The appeal of this approach lies in its simplicity. The problem, however, is that it doesn’t account for your specific situation. To determine your specific needs, you may want to estimate your annual retirement expenses.
Use your current expenses as a starting point, but note that your expenses may change dramatically by the time you retire. If you’re nearing retirement, the gap between your current expenses and your retirement expenses may be small. If retirement is many years away, the gap may be significant, and projecting your future expenses may be more difficult.
Remember to take inflation into account. The average annual rate of inflation over the past 20 years has been approximately 2%.1 And keep in mind that your annual expenses may fluctuate throughout retirement. For instance, if you own a home and are paying a mortgage, your expenses will drop if the mortgage is paid off by the time you retire. Other expenses, such as health-related expenses, may increase in your later retirement years. A realistic estimate of your expenses will tell you about how much yearly income you’ll need to live comfortably.
Once you have estimated your retirement income needs, take stock of your estimated future assets and income. These may come from Social Security, a retirement plan at work, a part-time job, and other sources. If estimates show that your future assets and income will fall short of what you need, the rest will have to come from additional personal retirement savings.
By the time you retire, you’ll need a nest egg that will provide you with enough income to fill the gap left by your other income sources. But exactly how much is enough? The following questions may help you find the answer:
When you know roughly how much money you’ll need, your next goal is to save that amount. First, you’ll have to map out a savings plan that works for you. Assume a conservative rate of return (e.g., 5% to 6%), and then determine approximately how much you’ll need to save every year between now and your retirement to reach your goal.
The next step is to put your savings plan into action. It’s never too early to get started (ideally, begin saving in your 20s). To the extent possible, you may want to arrange to have certain amounts taken directly from your paycheck and automatically invested in accounts of your choice [e.g., 401(k) plans, payroll deduction savings]. This arrangement reduces the risk of impulsive or unwise spending that will threaten your savings plan — out of sight, out of mind. If possible, save more than you think you’ll need to provide a cushion.
You need to understand the types of investments that are available, and decide which ones are right for you. If you don’t have the time, energy, or inclination to do this yourself, hire a financial professional. He or she will explain the options that are available to you, and will assist you in selecting investments that are appropriate for your goals, risk tolerance, and time horizon. Note that many investments may involve the risk of loss of principal.
The following are among the most common retirement savings tools, but others are also available.
Employer-sponsored retirement plans that allow employee deferrals [like 401(k), 403(b), SIMPLE, and 457(b) plans] are powerful savings tools. Your contributions come out of your salary as pre-tax contributions (reducing your current taxable income) and any investment earnings are tax deferred until withdrawn. These plans often include employer-matching contributions and should be your first choice when it comes to saving for retirement. 401(k), 403(b) and 457(b) plans can also allow after-tax Roth contributions. While Roth contributions don’t offer an immediate tax benefit, qualified distributions from your Roth account are free of federal, and possibly state, income tax.
IRAs, like employer-sponsored retirement plans, feature tax deferral of earnings. If you are eligible, traditional IRAs may enable you to lower your current taxable income through deductible contributions. Withdrawals, however, are taxable as ordinary income (unless you’ve made nondeductible contributions, in which case a portion of the withdrawals will not be taxable).
Roth IRAs don’t permit tax-deductible contributions but allow you to make completely tax-free withdrawals under certain conditions. With both types, you can typically choose from a wide range of investments to fund your IRA.
Annuities are contracts issued by insurance companies. Annuities are generally funded with after-tax dollars, but their earnings are tax deferred (you pay tax on the portion of distributions that represents earnings). There is generally no annual limit on contributions to an annuity. A typical annuity provides income payments beginning at some future time, usually retirement. The payments may last for your life, for the joint life of you and a beneficiary, or for a specified number of years (guarantees are subject to the claims-paying ability of the issuing insurance company). Annuities may be subject to certain charges and expenses, including mortality charges, surrender charges, administrative fees, and other charges.
Note: In addition to any income taxes owed, a 10% premature distribution penalty tax may apply to taxable distributions made from employer-sponsored retirement plans, IRAs, and annuities prior to age 59½, unless an exception applies.
By Tina Mason
One of the best ways to invigorate your saving strategy is by issuing yourself a challenge. Not only does the competition make it a little more fun, but you’ll also learn valuable lessons about the long-term benefits of discipline, the way your daily spending habits impact your quality of life, and just how much you can accomplish when you set your mind to it.
If you’re looking to make improvements to your financial planning and add a little extra padding to your savings account, here are five financial challenges you can try.
Take a new look at a favorite vice: There’s nothing wrong with splurging every now and then. But if you’re spending $5.00 on a cup of coffee every day, you may want to take a fresh look at how you get your morning pick-me-up. Could you live with making coffee at home and saving yourself over $1,000 a year?
Dive into the gig economy: If you find yourself with lots of free time and aren’t sure what to do with it, challenge yourself to finding a part-time gig. If you love nothing more than driving around town listening to music, maybe Uber would be a good fit. Fancy yourself a writer? Try to get published as a freelancer. There are tons of opportunities that will fit where, and how, you need them to.
Live like you’re single: Remember when you were young and single? You could somehow survive in an apartment the size of your living room. You ate Ramen noodles for breakfast. And even if you had less money saved up, you may have felt more financially free. Granted, your spouse may not appreciate Ramen the way your 20-year old self did. However, we all behave differently when we engage with others. By focusing solely on your own finances for a brief stint, you may be able to indicate where you’re letting money fall through the cracks.
A dollar a day: This one’s simple. Get a jar, and add a dollar to it every day. If you’ve got something you’re saving for, simply wait until you’ve gotten there. If not, consider it a rainy day fund for an emergency. You’d be surprised how easy it is to forget about a dollar every day.
Pile up your perks: Perks are everywhere these days. Debit and credit cards will often offer discounts, deals or cashback. Some people go coupon crazy at the grocery store. In this challenge, you are tasked with taking cash equal in value to the perks you’ve accumulated and putting it into a new savings account. It is a way of making your savings seem tangible, and will always help to remind you to look for savings in your day to day life.
At The Milford Bank, we’re always looking for great ways to help you grow your wealth, protect your family and live your best life. To learn more ways to save, stop by any office location in Milford or Stratford or check out our Online Learning Center here.
By Rebecca Tudor
Every year, the American Bankers Association releases an annual calendar including specific dates for consumer awareness observance days. While “Earned Income Tax Credit Awareness Day” might not have the same ring as Halloween or Independence Day, such observance days can be incredibly useful for taking a moment to assess your own financial status and learn something new about managing your wealth.
This year, we’ll be following the ABA’s calendar closely, tying in articles to provide some extra information for you to celebrate observance days. Pay close attention—we may even be running special events to celebrate some of these festivities at our office locations!
Read on to see the ABA’s schedule for 2018. Each month will provide you different financial perspectives, so we challenge all Milford Bank customers in Milford and Stratford to get creative and show us how they plan to celebrate!
January
1/26: Earned Income Tax Credit Awareness Day
1/28: Data Privacy Day
1/29-2/2: Tax Identity Theft Awareness Week
February
2/26-3/3: America Saves Week
March
3/4-3/10: National Consumer Protection Week
3/20: National Agriculture Day
April
National Financial Literacy Month—celebrated all month
Records and Information Management Month—celebrated all month
4/1: National 1 Cent Day
4/16-4/22: National Health Care Decisions Day
4/17: National Tax Day
4/20: National Teach Children to Save Day
4/29-5/5: National Small Business Week
May
Older Americans Month—celebrated all month
Military Appreciation Month—celebrated all month
June
American Housing Month—celebrated all month
National Internet Safety Month—celebrated all month
6/15—World Elder Abuse Awareness Day
6/28—National Insurance Awareness Day
July
National Make a Difference to Children Month—celebrated all month
August
Back to School
September
College Savings Month—celebrated all month
National Preparedness Month—celebrated all month
9/9—National Grandparents Day
October
National Cybersecurity Awareness Month—celebrated all month
National Crime Prevention Month—celebrated all month
Family Health Month—celebrated all month
10/1-10/5—Customer Service Week
10/1-10/5—Financial Planning Week
10/18—Get Smart About Credit Day
November
Military Family Month—celebrated all month
National Scholarship Month—celebrated all month
National Family Caregiver Month—celebrated all month
December
Identity Theft and Protection Awareness Month
At The Milford Bank, we’re committed to helping you stay focused on your bottom line all year round. So be sure to check out the ABA calendar and find some topics that pique your interest, as we’ll be putting together supplemental educational resources to correspond with the ABA’s observance days throughout 2018.
If you’re interested in learning even more about a particular subject from the calendar, be sure to check out our Online Learning Center too. It’s a wealth of resources designed to help all our customers achieve the best possible financial outcome for their family’s needs and wants. To learn more, click here.
By Cortney Meng
It was only three years ago that Millennials became the largest generation in the U.S. labor force, surpassing the Baby Boomers with employment numbers of 53.5 million. This seemed to be a coming-of-age moment for Millennials, but new research indicates that in spite of three straight years as the top demographic in the labor force, Millennials have yet to turn their earnings into savings.
According to a new Bank of America survey, it was found that 46 percent of Millennials had no money in a savings account in 2017. Even more startling, this number actually increased from 31 percent over the span of just one year.
Given the fact that Millennials are working more but spending less, this financial epidemic may be rooted in poor spending habits. Let’s take a deeper dive into how Millennials are spending their money in 2018, and what they can do to break the cycle and bolster their savings.
Spending on comfort and convenience
A Charles Schwab report found that Millennials, more so than previous generations, are willing to spend frivolously on comforts and conveniences. 60 percent admitted to spending more than $4 on coffee, 79 percent would splurge to eat at the hot restaurant in town and 69 percent buy clothes they don’t necessarily need. Millennials also surpassed both Generation X and Baby Boomers when it came to shelling out cash for the latest tech gadgets and live events, as well.
Bills, bills, bills
Though Millennials do their share of frivolous spending, not all the bills in the mailbox are a choice. In fact, a recent Mother Jones study compared Millennials to young families from the 1980’s and 1990’s and found that young adults today pay about $1,000 more on healthcare, $1,500 on pensions and Social Security, $2,000 more on overall housing and $700 more on education.
Simply put, cost of living increases have put a damper on what earnings Millennials have generated. That said, the need to save for the future must remain a top priority. Millennials must reconcile the lifestyles they wish to lead with the realities of the world they want to live them in.
So what can Millennials do to start getting their savings accounts in the black?
Forbes recently outlined some of the ways in which Millennials can begin breaking the bad habits that have gotten them to this point. Here are a few key points:
To learn more about developing an approach to saving that will get you where you want to be, stop by any office of The Milford Bank in Milford or Stratford, or check out our Online Learning Center here.
By Matt Kelly
At the end of January, the Dow Jones Industrial Average capped off another record-setting month of growth, settling in around 26,600 points. Just a week into February, and the market had shaved off nearly 2,000 points as analysts began to question whether the bull market had finally slowed to a halt and whether we were in for a correction, recession, or more.
Now, investors find themselves quickly fluctuating between rapid sell-offs and frenzied buying sprees, uncertain about the more long-term economic outlook.
Of course, it’s not advisable to simply liquidate your assets and keep it all as cash under your mattress just because the stock market is volatile. Instead, this is a good point to calmly evaluate your needs, your long-term goals, and consider tweaking your investment strategy to make sure you don’t waste any time growing your portfolio.
While you should never make an investment without first consulting your advisor, here are a few tips to help steer you in the right direction.
You don’t need to abandon the markets entirely: Even when the markets suffer huge losses, there are still plenty of successful companies that weather the storm. You don’t need to pull all your savings from the stock market, but you do need to address whether or not your portfolio is diverse and conservative enough to be protected from a bear market.
Check out indexed and whole life insurance policies: Not only is life insurance an important component of your family’s financial planning, it can also act as an investment vehicle depending on the type of life insurance you procure. A whole life insurance policy will provide you with extra cash every time you pay your premiums. Indexed policies use that cash value and invest it into accounts tied to an index like the S&P 500. They have a floor of zero, meaning that you won’t lose money in a bad year, but still retain upside potential.
Consult with your financial advisor: Watching the stock market go up and down can be more emotional than an Oscar-nominated drama. And if you’re emotional, you may not be making sound financial decisions. Consult with your financial advisor before making any sudden changes to your investment strategy. This will ensure that your goals, and your financial needs, are both working in conjunction to secure your future and maximize your wealth.
To learn more about the savings opportunities available to you, stop by any office of The Milford Bank in Milford or Stratford, or check out our Online Learning Center here.
By Chaz Gaines
In the Savings Spotlight Series, we’ve made the case that there are numerous stepping stones throughout our lives that lead us down the path to financial well being. At every point, you’ll need to take a different approach. A teenager, for instance, might be saving for their first car. An individual nearing retirement is going to have a drastically different goal, and method, for reaching their savings objective.
Already in this series, we’ve provided useful savings tips for both first-time banking customers and recent college graduates. In Part 3 we’re going to fast forward a decade or two along our path to retirement, focusing in on the savings needs of individuals in the middle of their careers.
Maximize employer benefits: Most of the businesses that offer retirement benefits will no longer contribute after you’ve left the company. Now, nearing the height of your earning power, you should be doing all you can with the remainder of your working years to take advantage—especially if your employer will match your contributions.
Balance retirement and college funds: Many individuals at this stage in their lives must reconcile the need to have a forward-thinking retirement-oriented saving strategy while simultaneously helping their children get started on their own path. It can be challenging, but your focus when crafting a budget and savings strategy should balance both.
Bolster your emergency account: Many individuals at this stage in their working life have been at their jobs for twenty years or more—making them feel quite secure. But sometimes, business decisions are out of our control, and many families get blindsided by that false sense of security. Even if you expect success, a failure to keep an emergency cash account funded could put your family at risk. Many experts believe you should have at least six to nine months salary readily available in case of emergency.
Expect the unexpected: Just like it’s important to plan for emergencies throughout your life, it’s important to plan for the end of your life too. If you were to pass away today, your grieving family would still have to keep paying the mortgage, fund college accounts and plan for retirement—all without your income. While this is a sensitive matter in which thinking about money should be secondary, it’s nonetheless a reality that your family will have to cope with. Securing life insurance will provide the coverage your family will need in the event that the worst comes to pass. Some policies, like whole life insurance, even have features to assist with your savings goals.
Shift investments to meet changing goals: Every investment vehicle offers a unique benefit. So if your financial goals are shifting, shouldn’t your savings strategy? When we’re young, we have more ability to rebound from a risky investment. We also have more time to let a certain, conservative investment grow. Now, in the middle of your working life, it’s important to take a moment to reflect on whether the vehicle that got you this far is going to be the vehicle that gets you all the way to the finish line, or if it’s time to trade in.
To learn more about crafting the best saving strategy for you and the needs of your family, check out our Online Learning Center or stop by any office of The Milford Bank in Stratford or Milford today.
By Chaz Gaines
Every individual has different goals and unique circumstances that help to guide the decisions they make when it comes to their savings strategy. Some people have decades of work ahead of them to steadily sock away money for retirement, while others are looking to gain ground quickly with retirement just a year or two away. Some individuals have large families with children to send off to college, while others are responsible for only themselves.
In the Savings Spotlight series, we’ll take a look at some of the big benchmark moments throughout life. We’ll look at how teens, recent graduates, young families, and those closer to retirement all have varying needs that require a different savings approach.
In Part 1, we’ll provide some savings advice for teenagers who are first-time savers. Just because they’re young, it doesn’t mean that their summer jobs or weekly allowances can’t help them to begin building a robust portfolio to maximize their savings now. If you’re a teen, or have a teen, who is just starting to learn about saving money, here are a few tips to get them started.
Distinguish between short, medium, and long term savings
It’s important for kids to be kids, while also learning fiscal responsibility. As such, there’s nothing wrong with a teen wanting to save up for a concert or snowboard at the same time they’re saving for college, or even retirement. It’s simply about making a clear distinction and sticking to your plan.
Putting savings strategies into context
When it comes to long term saving, it is easy for teens to be too reactionary. For instance, a minor stock market correction could seem like the next Great Depression if you don’t have the benefit and wisdom that comes with watching such fluctuations occur for decades. Teens must remember that, depending on the investment vehicle, the money they set aside today may not be used again for another half century. As such, it’s best to set a strategy and stick to it, rather than continually pull your money in and out of savings to try and time the markets.
Thinking about risk and reward
Risk and reward are inherent in any investment. Finding the most optimal vehicle for your needs is all about striking the right balance between risk and reward. Young investors don’t typically have the assets to make a lot of risky investments. But conversely, they’ve got lots more time to make up ground if a high risk-high reward investment doesn’t pan out. Young investors are in a unique opportunity to use their age to their advantage, but you must assess your risk tolerance carefully first.
Never too young for life insurance
While teenagers might think they’re immortal, certain types of life insurance can offer significant savings upside for teens. Whole or permanent life insurance contracts provide additional savings components, as they accrue cash value when you make premium payments. And because age and health are critical elements in determining the premium costs of a life insurance contract, the younger you are when you lock in your rates with a permanent plan, the cheaper it will be and the earlier you’ll start saving. Not only will you protect yourself and your future family later in life, but you’ll have a big leg up on your cash value investment too.
At The Milford Bank, we have helped countless members of the Milford and Stratford community develop successful savings strategies for their wants and needs. No matter where you might be with your own personal savings strategy, we can help. Stop by any Milford or Stratford location near you, or check out our Online Learning Center to learn more.
And be sure to stay tuned for Part 2 of this series, when we’ll be highlighting savings strategies for recent graduates.
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