Keys to a Great Retirement

After years of working and doing what you have to do, retirement generally is the period of life when you do what you want—if you’ve planned for it financially.

After years of working and doing what you have to do, retirement generally is the period of life when you do what you want—if you’ve planned for it financially. The wiser you’ve saved, spent and invested, the greater your options to travel, spend more time with family, pursue hobbies or volunteer more, particularly during an age of inflation and longer life spans. Here are the keys to preparing for a great retirement:

• Calculate how much you need to save for retirement
Middle-income households usually need to replace 70 to 75 percent of their current living expenses to maintain their standard of living for retirement. A good rule of thumb is to estimate how much you’ll need to withdraw from savings during your first year of retirement (adjusted for inflation) and multiply that amount by 25. For example, if you want to withdraw $40,000 during your first year of retirement, you’ll need to have saved $1 million.
• Develop a plan
Once you know how much money you’ll need for retirement, you need a specific plan to accumulate it. “Most families may save toward their retirement; but without a plan, their saving is random and haphazard,” says David John Marotta, president of Marotta Asset Management of Charlottesville, Va. Having a plan means determining how much to save each month to fund retirement, then taking steps such as cutting expenses or earning extra income to secure this amount.
• Begin immediately
The earlier you start to save, the more time your money has to grow. “Every year you delay adequately funding your retirement cuts in half your retirement standard of living,” Marotta says. “The wisest financial decision you can make is to start—now!”
• Start with your 401k
This personal investment plan is “the best place to save for retirement,” says Steve Casto, a retirement educator in Omaha, Neb., and author of Is Your Retirement Heading in the Right Direction? If your company matches your contribution, you should contribute the full amount for the maximum benefit. It’s free money and a tremendous return on your investment, even before you start working to make it grow. In addition to building your nest egg, your contribution reduces your taxable income.
• Contribute to a Roth IRA
If you’re able to save more than the maximum 401k contribution that your employer will match, contribute to a Roth IRA if you’re eligible. (Your adjusted gross income must be under $110,000 for single or head-of-household taxpayers or married couples filing separately and who do not live with their spouse, or $160,000 for married couples filing jointly.) “Yes, you lose the tax savings now,” Casto says, “but your money grows tax deferred and tax free. You will have more money in retirement.”
• Invest wisely for growth
To make the most of your retirement savings, invest for growth, which generally means investing in stocks. Your best investment option probably is a stock market index fund, such as one that tracks the S&P 500 or the “total market,” because it usually outperforms other mutual funds. This strategy has four big advantages: It’s cheap, easy, fairly stable and, even though there may be occasional setbacks, it works.
• Review your plan annually
Circumstances change, so it’s smart to make adjustments as needed. “Retirement planning isn’t simply a matter of putting some money in a retirement account,” Marotta advises. “It requires periodically working through the mathematical assumptions and projections required to ensure you will meet your retirement goals. Annual reviews guarantee that your changes in lifestyle are minimized and the chances of meeting your retirement goal are maximized.”
• Seek help if needed
If you don’t feel confident in knowing how or how much to save for retirement, consult with a financial professional such as a certified financial planner or CPA. Gordon Hecker, vice president of Nationwide Financial in Columbus, Ohio, says “a professional can help you assess your current standing, evaluate your retirement goals and develop an investment strategy to fit your needs.”

So whether retirement is just around the corner or a distant drumbeat, begin today to plan and prepare. Wise choices today mean more options tomorrow.

John Nardini is a frequent contributor to American Profile.

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