Is it too early to be thinking about retirement?
Are you too young to be concerned about life after you’ve packed it all in?
You should know the answers to those questions by now.
The younger you are when you start applying the basic principles of sound money management, the better your chances of accumulating the kind of money you’ll need to enjoy a good life in your leisure years.
A million dollars may seem like a lot of money to you now. But if you’re young, say under 40, even a million bucks won’t be enough to live like royalty (or anything close to it) by the time you reach retirement age. If you’re older than 40 and haven’t yet stashed away that million dollars, you’d better get to work today.
Retirement will sneak up on you faster than you can imagine. When it does arrive, it can be one of the most carefree, fun-filled times of your life— or one of the most dreadful. Which way it turns out for you will depend almost entirely on how well you’ve prepared.
A retirement free of financial worries is a blessing; a retirement spent in debilitating worry about keeping up with relentless increases in the cost everything is a living hell. If you don’t think so, just ask someone who is struggling to get by on Social Security (and perhaps a small pension).
Whether you are age 25 or 55, the most important question you need to ask about your retirement is: “How much income will I need to maintain my present lifestyle?”
Unless you’re an accountant or financial planner who specializes in retirement planning, you probably don’t have a clue. And you aren’t alone—most people don’t think much about retirement until it looms just over the horizon.
By then, it’s often too late to take the simple steps that can assure comfortable and rewarding leisure years.
Setting your target
Financial planners typically say you will need 80 percent of your preretirement income to maintain your current lifestyle in retirement. If you earn, say, $80,000 per year just before you retire, you will need $64,000 a year to maintain the same lifestyle.
If your annual income is $120,000, you’ll need $96,000 per year to retire in the style to which you have become accustomed.
Be assured that kind of income isn’t going to materialize out of thin air. If you expect to enjoy a comfortable retirement, you’re going to have to arrange for it yourself.
And no one else is going to worry about your financial health in retirement—not your employer, your banker, your brother-in-law, or your old English teacher. If you don’t take care of it yourself, it won’t happen (unless you have an uncle named Warren Buffet who loves you—in which case, you can stop reading now.)
Furthermore, when it comes to estimating your need for retirement income, you are far more likely to underestimate what you will need than overestimate it. If there are any financial surprises in this equation, they probably will be unpleasant ones.
Yes, you have Social Security. But all you can count on from that government program is a little gravy. You’re going to have to provide the meat and potatoes of retirement yourself.
Tools at your disposal
The good news is that Congress has made it easier than ever to feather your retirement nest. They’ve laid out a smorgasbord of retirement programs that earlier generations could hardly have dreamed of. Still, they’re not going to do the essential work for you.
An important principle of sound money management is to participate to the fullest possible extent in every government-approved retirement program available.1 The most popular plans include
- Individual Retirement Accounts (IRAs)
- Roth IRAs
- 401(k) Plans
- 403(b) Plans
- SIMPLE IRA Plans (Savings Incentive Match Plans for Employees)
- SEP Plans (Simplified Employee Pension)
Depending on your finances and corporate structure, some plans will be more suitable for your needs than others. Regardless of the plan (or plans) you choose, action from you is needed to get the ball rolling.
Back in 1918, when officials at Sears, Roebuck and Co. announced their new pension plan, many observers considered it a radical idea. Instead of the traditional formula where the company invested money on behalf of the workers and then paid the retirees a set amount in retirement, the managers at Sears had a new idea.
Their profit-sharing pension plan allowed both the company and the employee to contribute a fixed percentage of each employee’s wages into the employee’s individual retirement account. Sears was the first company to offer this type of defined contribution retirement program.
Today, every business owner and every employee may choose from a variety of retirement programs authorized and monitored by the federal government. As with the Sears plan, though, nothing happens until the principal (you) takes action. Before you can enjoy the benefits of a good retirement program, you must take the first step by signing up for it.
William J. Lynott is a freelance writer whose work has appeared regularly in leading trade publications and newspapers as well as consumer magazines He can be reached at firstname.lastname@example.org or through blynott.com.
Editor’s note: After more than 25 years of writing this column, William Lynott is moving toward semi-retirement himself and this is expected to be his last contribution to Chiropractic Economics. His smart and informative writing will be missed.
1 Internal Revenue Service. “Types of Retirement Plans.” https://www.irs.gov/retirement- plans/plan-sponsor/types-of-retirement-plans-1. Updated Oct. 2015. Accessed Aug. 2016.