Estimating Your Retirement Income Needs
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.
Early retirement has always been a dream for many Americans, yet most have not been able to achieve that goal. Prior to the COVID-19 pandemic, 46% of retirees said they ended up retiring earlier than expected due primarily to four factors: health conditions, emotional status, financial readiness, or job loss. That means, while many were hoping to retire early, others were forced into it due to unforeseen circumstances.
Likewise, 43% of today’s largest segment of the workforce – the Millennial generation – is expecting to retire early. But, more recent data suggests that, due to the pandemic, that number has grown even higher, with 20% of the total workforce, including 15% of Millennials, saying current conditions have accelerated their retirement plans.
The question is, can they afford to retire early? Some people will have a very hard time if they are pushed into early retirement, while others may have been able to plan ahead and, even if they weren’t planning on retiring early, will be able to live comfortably. Here are some things to consider as you plan for retirement, regardless of your current age.
Invest – Despite the fact that the stock market has been extremely volatile this year, consider investing. Whether you are just entering the workforce or nearing standard retirement age, maximizing your retirement investments may help you when you do retire. That includes your 401k or IRA contributions. But, you should do it wisely and adjust your allocations based on your current and expected circumstances to maximize your retirement funds. Be sure to speak with a financial expert who can help you make choices that are best for you.
Social Security – The amount of social security benefits you receive is dependent upon when you claim benefits. The longer you wait, the more you’ll receive. Waiting until full retirement age (65-67 years, depending on birth year) will mean your benefits can be almost a third higher than if you take them at an earlier age. Similarly, if you retire late (or at least wait to start claiming your SSA benefits), you stand to get almost a third more than at standard retirement age. If you can afford to live comfortably without it, waiting to claim your benefits may be an advantage later in life.
Understand retirement – Perhaps the most important part of planning for retirement is knowing what you’ll need to live comfortably. That includes what you plan to do once you retire, what your other sources of income may be, what your expenses will be, and other factors. Retirement planning can also impact where you retire: A significant portion of Americans today are looking to retire in other countries with lower costs of living. Remember, if you plan on early retirement, you’ll need more savings because you’ll be living off your retirement income for longer, and don’t forget to factor in healthcare costs, inflation, and changes to expenses as you age.
Pay off debt – If you have existing debt, try to pay it down before you decide to retire. Massive debt can impact your retirement lifestyle.
Build your emergency fund – It’s always good to have an emergency fund that can cover several three to six months worth of expenses should an emergency arise. This is particularly important when you retire, so you won’t have to dip into your retirement savings to cover unexpected costs.
Evaluate your current spending – If you are looking to put more into your retirement savings, the easiest way is to reduce your current spending. If you need help saving, there are some great digital tools that can help you put away extra income, which you can put towards retirement.
It can be hard to plan far into the future, especially when it involves a dramatic change like no longer working. But, by taking the steps today and being aware of some of the factors that can impact your retirement income, you can set yourself up more comfortably. If you need advice on saving, retirement plans, or other ways to make sure you have enough saved, your bank’s financial experts are ready to help.
By Celeste Lohrenz
Now that the weather is finally getting nicer, there are countless projects around the house you may want to tackle. Maybe you’ve already gotten your lawn into better shape, or planted your garden, or even done some annual spring cleaning. Have you given the same attention to your finances? Just as you go through spring maintenance in and around your home, your finances may be in need of some polishing to make sure you’re getting the most out of your money.
Here are some tips to help get you started on getting your finances in shape.
Reduce clutter – If you’ve changed jobs several times during your career, you may have old retirement accounts that you aren’t managing anymore. Looking into closing or moving them into your more active accounts will help you track you overall financial health, and will reduce your security risk by eliminating those accounts you don’t monitor.
Organize your documents – Take some time to make sure all your financial documents are organized in one place. That way, you always know where they are when you need them, and it gives you a chance to do an inventory and locate items you may have misplaced or lost over the years. You can do the same with your digital records – create folders in your computer storage and email specifically for financial records. Be sure to password protecting those files and emails for added security. Physically or digitally shred any old documents you no longer need.
Clean your home – In addition to your financial clutter, you may have acquired a host of items over the years you no longer use. Go through your home and collect those items and sort them into three groups: sell, donate, throw out. You may be able to claim your donations as a tax deduction if you itemize your returns, or you can sell them using local social media sites.
Retirement planning – If you don’t regularly re-assess your retirement finances, take a look at your IRAs and 401k accounts to make sure your contributions and savings are on track for a comfortable retirement.
Look over your budget – Take a close look at your monthly budget. See where you may be overspending or paying for things you don’t need of use, like redundant digital services. It may take several modifications to get to a budget you’re comfortable with. If you haven’t created a budget, this could be a great time to do it. Tracking you spending is the easiest way to start saving more. In addition to a monthly budget, you can set an annual goal for savings.
Create a bill schedule – Most of your bills can probably be set to pay automatically. This will help keep your payments on time and reduce the risk of late fees and credit damage. You can also create a spreadsheet with every monthly bill (mortgage/rent, loans, credit cards, utilities, phone, etc.), so you can more easily track your payments and keep them on time. If you’re living with roommates, this can be a great way to manage combined bills.
Emergency fund – If you’ve had to dip into your emergency fund during the coronavirus pandemic, you should consider making a plan for replenishing it as things start to return to normal. If you don’t have an emergency fund, the current situation is a great example of why you should.
Automate saving – There are many tools that can help you automate saving, like Plinqit, a free tool that lets you set your personal savings targets and schedules based on your budgeting needs. You can even earn additional money in several ways, like reaching your goals, referring others, and using financial education resources.
Cyber security – Make sure all your digital devices have good security software installed, including your smartphones, to reduce the risk of your accounts and finances being compromised. Be sure to use very secure passwords and multiple layers of authentication.
It’s a good idea to regularly monitor all your financial accounts and credit reports to make sure everything is in order and you haven’t been compromised. Going through this financial spring cleaning list can make it easier to manage your financial health. If you need advice or information on any of your accounts, services, or tools, your we are ready to help.
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!
1/26: Earned Income Tax Credit Awareness Day
1/28: Data Privacy Day
1/29-2/2: Tax Identity Theft Awareness Week
2/26-3/3: America Saves Week
3/4-3/10: National Consumer Protection Week
3/20: National Agriculture Day
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
Older Americans Month—celebrated all month
Military Appreciation Month—celebrated all month
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
National Make a Difference to Children Month—celebrated all month
Back to School
College Savings Month—celebrated all month
National Preparedness Month—celebrated all month
9/9—National Grandparents Day
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
Military Family Month—celebrated all month
National Scholarship Month—celebrated all month
National Family Caregiver Month—celebrated all month
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.
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