But getting to the point where you can pay for the retirement you want isn't easy; it requires hard work and sacrifice during your working years. For those born in the following years, retirement age creeps up by two months per year, meaning that someone born in 1955 would have a full retirement age of 66 years, two months. And without the help of Social Security benefits, most people wouldn't be able to afford retirement at age 65 without putting a dangerous strain on their retirement savings. Without the help of that high average return, you'd need to save much, much more money during your working life to get enough retirement savings built up. For example, let's say you've saved $1,000 per month (which adds up to $12,000 per year) and put it in government bonds, getting an average annual return of 2%. On the other hand, if you'd put that same $1,000 per month in stocks and gotten an average annual return of 7%, you'd have $1,212,876 saved up after 30 years. However, few retirees can reduce their expenses to the point where they can comfortably live on nothing but their Social Security benefits. As of January 2017, the average monthly Social Security benefit is $1,360. This means that your tax challenges will likely increase rather than decrease once you retire. And you should definitely budget for the taxes you'll be paying on part if not all of your retirement income.
Do you feel overwhelmed thinking about retirement planning? It’s one of the most common topics we’re asked about. One way to make it more manageable is to break it down into a series of decisions:
How much do you need to save? This is the most complex and the most important question. After all, none of the other questions matter if you don’t have enough in retirement savings.
While there are lots of rules of thumb, the actual number depends greatly on your particular situation like your expected retirement expenses, how much you’re projected to receive in Social Security and pension benefits, when you plan to retire, how much you’ve currently saved, and how aggressive an investor you are. Your best bet is to run a retirement calculator that takes these factors into account. If you’re unable to save the amount you need, consider slowly increasing your retirement savings over time (some retirement plans have a contribution rate escalator that will do this for you automatically) and/or adjusting your retirement goals.
Where should you put your retirement savings? First max out any match your employer is offering you. It’s hard to beat a 50% or 100% guaranteed return on your money.
Second, contribute as much as you can to an HSA if you’re eligible. That’s because the money not only goes in tax-free but can be used tax-free for qualified health care expenses, which you’ll almost certainly have in retirement. (This includes select Medicare and qualified long term care insurance premiums.) HSAs can also be used for any purpose penalty-free starting at age 65. That’s why you might also want to avoid tapping into your HSA even for qualified health care expenses and instead invest it to grow for retirement.
Unless you have unique investment options in your employer’s retirement plan that you want to take advantage of, you might want to contribute to an IRA next. That’s because you’ll have more flexibility in how the money is invested (almost anything) and how it can be withdrawn. You can use IRAs penalty-free for qualified education expenses…