Planning for retirement can be intimidating. Begin by asking yourself a few simple questions to help you envision what you want your retirement life to look like. Once you have established the kind of lifestyle you want in retirement, you can start to figure out what that lifestyle will cost and how much you should start saving and investing to help you accomplish your goals. Whether you hope to be a jet-setting retiree or simply enjoy time with family in your own home, the sooner you get started on your plan, the closer you will be to your goals.
Questions to consider:
- Is your home paid for, or will you need to make mortgage payments?
- Do you plan to move?
- Do you plan to work part time?
- Would you like to take up travel or a hobby, and if so, what are the expenses involved?
- Will you need more or less income than you currently earn?
Know your retirement needs. Retirement can be expensive. Experts estimate that you will need about 70 percent of your pre-retirement income – lower earners, 90 percent or more – to maintain your standard of living when you stop working. Take charge of your financial future. The key to a secure retirement is to plan ahead.
Take advantage of employer’s retirement savings plan. If your employer offers a retirement savings plan, sign up and contribute all you can. Your taxes will be lower, your company may kick in more and automatic deductions make it easy. Over time, compound interest and tax deferrals make a big difference in the amount you will accumulate. Find out about what plan is available to you, and think about your needs. For example, how much would you need to contribute to get the full employer contribution and how long would you need to stay in the plan to get that money?
Open an Individual Retirement Account (US), or RRSP or TFSA (Canada). Americans can put up to $5,000 a year into an Individual Retirement Account (IRA) – even more if you are 50 or older. However, you can start saving for retirement with much less. IRAs also provide tax advantages.
There are two types of IRAs – a traditional IRA or a Roth IRA. The tax treatment of your contributions and withdrawals will depend on which option you select. Contributions to Roth IRAs are made with taxed income, so future withdrawals are tax free, while contributions to traditional IRAs are made pre-tax, so future withdrawals are taxed at the tax rates set at that future point in time. You can set it up so that an amount is automatically deducted from your checking or savings account and deposited in the IRA.
Canadians can contribute up to 18 percent of their previous year’s income into a Registered Retirement Savings Plan (RRSP), and up to $5,000 per year in a Tax-Free Savings Account (TFSA).
Find out about government benefits. Social Security pays benefits that are on average equal to about 40 percent of what you earned before retirement. For more information, visit the Social Security Administration’s website (U.S.) or Service Canada’s Retirement Planning webpage (Canada). Social Security is an essential part of retirement income for the large majority of Americans, so make sure you understand what options are available to you.
Ask Questions. While these tips are meant to point you in the right direction, you’ll need more information. Talk to your employer, your bank, your union or a financial adviser. Ask questions and make sure you understand the answers. Get practical advice and act now.