Are you contributing enough to your retirement plan? This is a question we all should be asking ourselves and giving serious consideration to. There is a great saying that applies, “If you don’t know where you are going, any road will get you there.”
Many of us think about saving for retirement, but we either do not get around to saving or we are only saving a small percentage of our pay. So what are the key things to think about as we contemplate our financial needs for retirement?
Let’s start at the end, with the basic understanding that there will still be expenses that require money when we retire. Our overall expenses may or may not be lower in retirement than they are today. We will still need to eat, pay for transportation expenses and take care of the housing expenses of taxes, insurance and up-keep, even if the mortgage is paid off. Lastly, there is the great unknown, medical expense. And these expenses haven’t even begun to touch on the fun things we want to do in retirement, when every day can be your weekend. So it’s essential that each and every one of us must take responsibility to plan for our personal retirement needs.
Try this formula to help determine the amount of money you will need in retirement:
Gross annual income, minus what you pay into Social Security, minus what you are contributing to Retirement, minus what you “accidentally” save each year, equals your annual need.
For example:
Gross Income - Social Security - 2% Retirement - accidental savings = need
$30,000 - $1,860 - $600 - $20 = $27,520
Once you have a realistic idea of what you will need in retirement, you should start to take into account your sources of retirement income. As you are well aware, Social Security was established as a supplement to help us pay for part of our retirement needs. The average benefit from Social Security is $13,410 a year; how much of your need does that cover? Unless your Social Security benefit covers your entire retirement need, you have an income gap that you will need to fill. This is where the Retirement Plan can help if you participate.
Taking some money out of your paycheck each pay period and putting it in the retirement plan makes it easy to be responsible to ourselves. This is how the gap starts to get filled, a little bit at a time, ideally over a number of years. Additionally, the money we pay ourselves isn’t taxable income until we start to take it out during retirement. Your company may also choose to provide a match that will increase the amount you are saving by even more. This is free money from your company that can make a huge difference in filling your retirement income need.
This is the ultimate in paying yourself first, filling in the gap and thinking long-term.