Memorable vacations do not happen by chance. They require a certain level of effort and advance planning to ensure that you stay within your budget and maximize your actual time away for fun, sightseeing and relaxation. The more you plan, the more likely your getaway will meet your expectations. With this in mind, it is surprising that so few people take the time to plan ahead for the longest vacation of their lives: retirement.
Saving for retirement is more of a marathon than a sprint. It requires significant planning and discipline to start as early as possible in order to meet your ultimate future goals. Too often individuals wait until the last decade or two of their working lives to evaluate what they will need to afford a comfortable retirement, let alone commit to a retirement savings plan to help them pay expenses during that period. In fact, according to the Employee Benefit Research Institute’s (EBRI) 2022 Retirement Confidence Survey, only 28 percent of workers feel very confident that they will be able to afford a comfortable retirement.
The first step in planning for retirement is to consider how you would like to spend your free time for 20, 30 or even 40 years. Do you hope to enjoy your time on the golf course, vacationing in exotic locales or traveling frequently to spend time with out-of-state family and friends? Do you hope to have a second home or to purchase a boat?
As lofty as your goals may be, you must also consider your ability to cover any related costs. Similarly, you should be prepared to meet your ongoing responsibilities to pay for everyday expenses, including taxes, insurance premiums, medical care, utilities and the general maintenance and upkeep of your home. Many of the expenses will increase as you age, and, with people living longer than ever, your reserves to cover these costs in the future will need to be larger. As a basis for planning, consider that the Social Security Administration estimates that about one out of every four 65-year-olds today will live past age 90, and one out of 10 will live past age 95.
So how much money will you need to afford the retirement of your dreams? The answer depends on your unique circumstances and goals. However, as a rule of thumb, the average person should aim to replace approximately 80 percent of their annual pre-retirement income. Just as a vacation budget should consider all of the out-of-pocket expenses you will incur once you arrive at your destination, your general retirement budget should reflect all of the out-of-the-ordinary extra perks you expect to enjoy during your golden years.
While soon-to-be retirees can count on Social Security to fund approximately 34 percent of their replacement income, this amount is neither sufficient for a comfortable lifestyle nor is it guaranteed to continue as a source of income for retirees in the future. As a result, it is critical that individuals of all ages estimate their future retirement expenses and develop a formal plan for saving enough to afford those costs and then some. Because one’s needs and goals change over time, this preplanning exercise will also continue to evolve over time. The sooner you start planning, the better prepared you will be.
Thankfully, a majority of businesses offer their employees access to 401(k) plans that enable workers to automatically defer a portion of their wages toward retirement savings. Those contributions lower workers’ taxable income in the year they are made and benefit from compounding interest and market gains that can increase balances significantly beyond their contribution amounts. Moreover, many employers “match” a portion of workers’ contributions. To receive this benefit, which is comparable to free money, the minimum that workers need to do is to contribute the maximum amount that will qualify them for the savings match.
Failing to plan is Planning to Fail
While you cannot plan for everything in life, you can take steps to be as prepared as you possibly can. The earlier you start, the more likely you will be able to manage through life’s uncertainties and enjoy the fruits of your labor in retirement. Make the time now to plan for what will be your longest vacation ever: retirement.
About the Author: Olga Ismail is a retirement plan consultant in the Ft. Lauderdale, Fla., office of Provenance Wealth Advisors (PWA), an Independent Registered Investment Advisor affiliated with Berkowitz Pollack Brant Advisors + CPAs, and a registered representative with Raymond James Financial Services. For more information, call (954) 712-8888 or email info@provweath.com.
Provenance Wealth Advisors (PWA), 515 E. Las Olas Blvd., Ft. Lauderdale, FL 33301 (954) 712-8888.
Olga Ismail is a registered representative of and offers securities through Raymond James Financial Services, Inc., Member FINRA/SIPC. Raymond James is not affiliated with and does not endorse the opinions or services of Berkowitz Pollack Brant Advisors + CPAs. PWA is not a registered broker/dealer and is independent of Raymond James Financial Services. Investment Advisory Services offered through Raymond James Financial Services Advisors, Inc., and Provenance Wealth Advisors.
This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of PWA and not necessarily those of Raymond James. You should discuss any tax or legal matters with the appropriate professional. The information contained in this report has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete.
401(k) plans are long-term retirement savings vehicles. Withdrawal of pre-tax contributions and/or earnings will be subject to ordinary income tax and, if taken prior to age 59½, may be subject to a 10 percent federal tax penalty. Investing involves risk, investors may incur a profit or loss regardless of the strategy or strategies employed. Future investment performance cannot be guaranteed. Matching contributions from an employer may be subject to a vesting schedule. Please review your retirement plan documents or consult with a financial professional for more information.
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Posted March 23, 2023