Start saving as early as you can

When it comes to retirement planning, there are a number of savings vehicles to choose from as well as investment options to understand and consider. Not to mention assumptions you need to make about inflation, Social Security benefits, your longevity and health care expenses during retirement. There are also lifestyle decisions to consider, such as where you’ll live, or whether or not you’ll continue to work at some level during part or all of your retirement. It’s a lot to think about, especially if you don’t know where or how to start.

The good news is that it doesn’t have to get too complicated. In fact, successful retirement planning can be broken down into two simple saving mantras:

     Start saving as early as you can.

     Save as much as you can.

This brochure will help you understand the power of these two saving mantras in more detail and context. The goal is to understand how these mantras can help take away the fear factor of retirement planning and empower you to take basic actions that will help set you up for retirement planning success.

TWO WAYS TO APPLY THE SAVING MANTRAS

BOOST YOUR RETIREMENT CONFIDENCE LEVEL

If you Google “retirement saving in America” or listen to financial news reports about retirement planning, you may become convinced that there is a retirement savings crisis. The majority of articles and reports suggest that people are not saving nearly enough for retirement. Check out these 2023 Retirement Confidence Survey statistics from the Employee Benefit Research Institute and Greenwald & Associates. How confident are you in these aspects of retirement planning? 

MAINTAIN YOUR LIFESTYLE IN RETIREMENT

Financial professionals recommend saving enough to replace 75-80% of your pre-retirement income to maintain your lifestyle in retirement. That number will vary according to your own unique situation and circumstances. One thing that doesn’t vary for each person is inflation. Inflation, or simply the cost of living, eats away at your money’s purchasing power and may not buy as much retirement in the future as it does today. When you retire, the cost of basic necessities as well as services you enjoy will continue to rise. Here are some hypothetical examples to consider in your retirement planning efforts:

FIVE STEPS TO HELP ACHIEVE RETIREMENT PLANNING SUCCESS

1. CHOOSE YOUR SAVINGS VEHICLE

401(k)s

A 401(k) is a tax-deferred retirement savings account offered by employers to their employees. Employees contribute money to their account on a pre-tax basis and employers can choose to match a percentage of that contribution. The money is deposited in various investments, typically a line-up of mutual funds (which are selected by the employer). Employees have the freedom to choose investments that meet their unique tolerance for risk and time horizon, whether it’s conservative, moderate or aggressive. Any investments earnings compound tax-deferred. Withdrawals are taxed at the normal tax rate, as long as they are made at age 59½ or older. Many employers are also starting to offer Roth 401(k)s. Unlike a traditional 401(k), contributions are funded with after-tax money, so they are not tax deductible; however, qualified withdrawals are tax-free. As of 2024, participants can contribute up to $23,000 per year to a traditional or Roth 401(k).

IRAs

An individual retirement account (IRA), traditional or Roth, is a taxdeferred retirement savings account established by an individual person (typically someone who is self-employed). IRA accounts are held by custodians, such as banks or brokerages. Unlike 401(k)s, IRAs allow account holders to choose from a much larger universe of mutual funds. They can also own many different types of assets within the account, including stocks, bonds, treasury bills and certificates of deposit (CDs). Like 401(k)s, contributions to traditional IRAs are generally tax deductible. Any earnings compound tax-deferred and you pay tax on withdrawals in retirement. Contributions to a Roth IRA are made with after-tax dollars, but qualified withdrawals are tax free in retirement. As of 2024, the annual contribution limit for traditional and Roth IRAs is $7,000

2. START EARLY

The earlier you start saving, the better chance your money has to grow enough to achieve your retirement goals. One way to illustrate this is the Rule of 72. It’s an easy way to calculate how long it’s going to take for your money to double. Just take the number 72 and divide it by the interest rate you hope to earn. That number gives you the approximate number of years it will take for your investment to double. The earlier you start saving, the more periods you will have for your money to “double.”

3. INCREASE YOUR SAVINGS RATE WHENEVER POSSIBLE

Once you get going in your IRA or 401(k), it’s easy to go on autopilot. You’ve officially made the move to save for retirement. You made sure to start early. You’re good, right? Wrong! It’s time to take the next step: increasing your savings. Remember your second retirement savings mantra: Save as much as you can. Cutting or reducing spending on things you don’t really need could allow you to bump up the money you’re putting into your 401(k) or IRA. And how about increasing your savings rate when you get a merit increase or a bonus? While you’re at it, couldn’t you bring dinner leftovers for lunch a couple times a week — or shop for a better cell phone plan or find a lower care insurance premium? Not to mention buying a certified pre-owned car instead of a brand new one. The savings can add up quickly.

Catching Up

If you are age 50 or older, the IRS allows you to contribute an additional amount of money to your 401(k) or IRA over the annual contribution limit. It’s called – appropriately, for many people – the “Catch-up Contribution.” If you’ve not been able to save as much as you wanted due to other financial priorities (such as funding a child’s education, caring for an aging parent or something else), this is a great opportunity to get back on track with your retirement savings.

4. DON’T FORGET ABOUT HEALTH CARE EXPENSES IN RETIREMENT

Here’s a big reason to start saving as early and as much as you can: a June 2023 report from Fidelity Investments estimated that a healthy 65-year-old couple retiring in 2023 will need $315,000 to cover their healthcare costs. Whether retirement is a long way off for you, or it’s starting to get closer, it’s a smart move to start planning for healthcare costs. The AARP Health Care Costs Calculator (www.aarp.org) is an educational tool designed to help you estimate your health care costs in retirement. You can include a spouse or partner in the calculation as well.

5. SEEK PROFESSIONAL ADVICE IF YOU NEED IT

While this brochure gives you some basics to help you achieve retirement planning success, you should know that professional advice is available if and when you need it. LPL Financial Professionals can give you hands-on personal guidance and advice to help you determine your retirement goals and how you can achieve them. Here’s how they can help:

§ Help you determine an appropriate retirement saving goal based on anticipated future living expenses § Help you factor in variables such as inflation, future health care expenses, life expectancy and projected investment returns

§ Develop an investment strategy to help meet your long-term needs

§ Discuss professionally managed retirement account investment solutions that may be of interest to you § Help you balance your retirement savings goal with other financial goals

§ Meet with you on a regular basis to track progress and make adjustments as necessary

WHAT’S YOUR NUMBER?

The ultimate question for almost everyone saving for retirement is “how much do I need to be saving?” Financial professionals recommend saving enough to replace 75-80% of your pre-retirement income. But is that benchmark right for you? Depending on your own unique circumstances or outlook, you may not need to save as much as that — or, you may need to save more. Here’s a high-level guide to help you through the thought process.

WHY YOU MIGHT NEED TO SAVE LESS

Depending on how you envision your life in retirement, your anticipated expenses may be much less than they are today. In addition, you may continue to earn money in retirement to help offset expenses. Here are some reasons you may not need to save as much for retirement:

§ If you have a mortgage, you plan on paying it off before you retire § You plan on downsizing to a smaller home, with a much lower mortgage payment

§ You plan on relocating to a less expensive city § You plan on working part-time during retirement

§ You anticipate other sources of income, such as investment rental properties § You expect Social Security benefits will provide adequate income for your needs

§ You will no longer need to financially support children or other family members § You anticipate good health, with no unexpected medical or longterm care expenses

WHY YOU MIGHT NEED TO SAVE MORE

On the other hand, with retirement potentially lasting 20 years or more, you may want to be more aggressive with your retirement saving goal. Here are some reasons you may need to save more for retirement:

§ If you have a mortgage, you plan on continuing to make payments during retirement.

§ You want to travel extensively or purchase a second home for an occasional getaway

§ You expect higher healthcare and medication expenses

§ You anticipate needing long-term care at some point

§ You plan on starting your own business and will need to provide funding

§ You will need to financially support children or other family members § You believe that your Social Security benefits will be reduced or inadequate

ABOUT LPL FINANCIAL LPL Financial is a leader in the retail financial advice market and the nation’s largest independent broker/dealer*. We serve independent financial professionals and financial institutions, providing them with the technology, research, clearing and compliance services, and practice management programs they need to create and grow thriving practices. LPL enables them to provide comprehensive guidance to millions of American families seeking wealth management, retirement planning, financial planning and asset management solutions. LPL.com *Based on total revenues, Financial Planning magazine June 1996-2023

 

*Source:  LPL Financial – DATCU Wealth Management, 10/2024.