Are You Among The Americans Planning for Retirement?

by Miranda Marquit · 11 comments

Compound interest
According to The Principal Financial Well-Being Index, retirement planning is on the rise in America.

The survey points out that only 28% of workers aren’t planning for retirement, which is a drop from 32% in the previous quarter. This news indicates that more American workers are making efforts to plan for retirement.

Are you one of them?

The Sooner You Start, The Better Off You’ll Be

With investing and retirement planning, the sooner you start, the better off you’ll be. There are two main reasons you should consider beginning your retirement planning as soon as possible:

1. Compound interest will do the heavy lifting.
One of the biggest reasons to start early is compound interest. As your account balance grows, you earn interest on your interest. With investments, like equities, this principle also holds true. The more shares you have, the higher your balance — and you can buy more shares with the money you earn, using not only your capital but your earnings to make more money.

2. You’ll have more time to recover from dips.
When you start earlier, you have more time to recover from market dips. That’s because the longer you’re in the stock market, the higher the chance that your shares are worth more. In other words, the longer you have until retirement, the less likely you in the red if you buy into an index fund that tracks stocks covering a wide swath of the economy.

Starting your retirement planning early (and getting an idea of how much you need to set aside each month) can help you build up the nest egg more effectively. The sooner you start, the longer your money can work for you.

Indeed, starting out by putting a smaller amount into your retirement account when you’re in your 20s can be more effective than trying to play catch-up with a large amount when you’re in your 50s.

So even if you don’t have much right now, just start small and begin building your retirement portfolio. Then, as your income increases, you can boost your contributions.

How Can You Start Retirement Planning?

The best place to start retirement planning is online. There are a number of retirement calculators that can help you figure out how much you’ll need in retirement, as well as help you estimate how much to set aside each month to reach your goal. (One such option is Personal Capital, a free option we’ve talked about before). If you’re still uncertain, there are plenty of reputable financial planners who can help you map out your future as well.

If you want to enjoy a successful retirement, it’s important that you make it a priority now. Check into what tax-advantaged accounts you qualify for, as well as the limits with contributions. You can open a 401(K) at your work and an IRA on your own. When possible, make it a point to max out your tax-advantaged accounts so that your money grows more efficiently.

How to Be More Confident That The Plan Will Work?

Retired couple on cruise
The financial state of the Social Security Administration, as well as the uncertainty of the current U.S. and world economies, might be making you nervous about your upcoming retirement. Although some elements of retirement will always be a risk — since you can’t know the future state of economies, your lifespan, and other factors that can affect your finances — careful and thorough planning will carry you a long way in security for the future.

As you approach retirement, these steps will help you create a plan that’ll work for you:
1. Start now, even if you think it’s too late.
We mentioned how starting as early as possible will give you a leg up, but even if you are older, you can still get a benefit if you start now, instead of later. You can’t go back in time to start saving in your 20s, but you’ll still be better off if you start to plan right away. Hopefully, you already have a stable and profitable 401k or other investments to draw from. If you don’t, start as soon as possible. Any day you delay is another opportunity missed.

2. Work out the details of your retirement lifestyle.
This includes housing, medical needs, plans for travel, income sources, and other factors that’ll determine your budget. The kind of life you live now may be very different than the one you’ll live after retirement. Retirement living is typically much simpler — by necessity and also desire. However, this doesn’t necessarily mean you’ll need less income.

Although you may be spending less (or nothing) on housing and bills, traveling more and preparing fewer home-cooked meals will cause your discretionary spending to increase. You also need to consider your present health and how it may change in the coming years. While Medicare will most likely provide for many of your medical expenses, you may need supplemental sources. Evaluate your current spending patterns as a clue for your future spending, and create a tentative budget along with your known expenses. If possible, consult a 3rd party for advice on whether your plan is realistic and sound.

3. Pay off as much debt as possible.
This is one of the simplest, but most crucial steps when retirement planning. Paying off debt when you have higher income frees up more of your retirement income for necessary living expenses. If some debt can’t be avoided, such as a mortgage, then at least pay it down as much as possible and look into refinancing to get a lower interest rate for your remaining payment plan.

4. Determine your best Social Security benefits enrollment age and ensure enrollment in Medicare programs.
This topic could be exhaustive, but in brief: the later you begin withdrawing from Social Security, the better. If possible, wait for your full retirement age, and even better, until you turn 70. The Social Security Administration’s website can help you calculate at which age you’ll receive the most benefits.

Medicare, the medical plan for Social Security, is very complex and contains parts A, B, C, and D. Some parts will include automatic enrollment, while others require you to apply a few months before you begin withdrawing Social Security. Talk with a Medicare expert and follow the guidelines on when and what to enroll in.

5. Update investments to avoid major losses close to retirement.
The younger you are when you start your investment plans, the more risk you can afford in hopes of higher returns. The closer you get to retirement, though, the more you’ll want to scale back on riskier investments and stick with those that’ll provide a stable and predictable income.

But, just because you’re retiring doesn’t mean you can keep risky investments such as stocks altogether. That’s because even the safety of bonds is losing purchasing power due to inflation. That’s why your asset allocation mix is one of the most important investment decisions you’ll make. Take time to look at your situation and figure out what you’re comfortable with, based on your need, willingness, and ability to take risks. This is a very individual decision that can be easy for some to make but almost impossible for others. For those having difficulties coming up with a right number, then a financial planner can always help.

Having the confidence to retire is hard, but these steps can help you a bit. What else would you add to this list?

Editor's Note: I've begun tracking my assets through Personal Capital. I'm only using the free service so far and I no longer have to log into all the different accounts just to pull the numbers. And with a single screen showing all my assets, it's much easier to figure out when I need to rebalance or where I stand on the path to financial independence.

They developed this pretty nifty 401K Fee Analyzer that will show you whether you are paying too much in fees, as well as an Investment Checkup tool to help determine whether your asset allocation fits your risk profile. The platform literally takes a few minutes to sign up and it's free to use by following this link here. For those trying to build wealth, Personal Capital is worth a look.

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{ read the comments below or add one }

  • iqra says:

    Working with a trusted financial advisor is one of the most important decisions you can make for your financial future.

  • Alex C says:

    When starting young, you can also handle a lot more risk, which could bring a lot higher results. If you are young and loose some money, it is not hard for you to recover it so young people can afford to loose mney, not that they want to loose money though.

    But I am glad to hear more people are saving for retirment because I do not think we can rely on Social Security much longer.

  • Robert says:

    I can attest to the time value of money. My wife started working at an optometrist’s office when she was 19. The optometrist offered profit-sharing and employee-purchase plans for all of the women in the office. She contributed 10% of her pay for 10 years. She ‘retired’ when we got married at age 29 and has only worked part-time as a substitute teacher. We have contributed very little to her retirement account since then. Today, 24 years later, her retirement account is almost $250,000. I waited to start my retirement account when we married and each year since I contribute the max to IRA’s and even more each year to my 401(k) (maxing out at $16,000 in 2010!), but my account is still less than $200,000. So, she saved 10% for 10 years when she was young and I have been saving well over 10% for 24 years, yet her account is still 20% larger than mine. I don’t believe I will ever pass her. We are not investment pros and we did not get involved in any get-rich-quick schemes. Anyone can do this, it just requires a little sacrifice each payday and an investment with a good mutual fund company. The time value of money is the key to having a decent standard of living in the golden years.

  • Jenny @ Frugal Guru Guide says:

    We started retirement planning in our 20s! It was a very good decision.

  • Nikita Brodskiy says:

    Like with any other types of savings – retirement savings need to be automatic and regular: set and forget approach. And I like article mentions the compound interest: a simple calculation shows that if you deposit the same annual amount in weekly installments you earn 10% higher interest than if you do it monthly.
    It speaks well for automatic, often and small contributions to the retirement account: it’s easier and more lucrative at the same time.

  • Scott says:

    1. Also try to remember that you should not attempt to beat the market with 401k plans (or any accounts for that matter). Focus on high quality and the lowest expense ratio funds that are offered in your plan. Over time that extra .5% – 1% compounded yearly will add up. Look for Index funds as they are generally cheaper in cost.

    2. Every time you get a raise in salary, extra commission, etc try to put most of that away as you never got it. This is very hard to do, but both my wife and I have been doing this for a long time now and because of this we are looking at retirement in our 50’s as apposed to our 60’s. As you get a raises over time keeping your standard of living at 50%-75% of your pay will make your retirement a lot less stressful

  • Christian L. says:

    Yup, as a young professional I’ve opened two retirement savings accounts. It offers a sense of accomplishment. And like Alex said, I’m willing to take on more risk with my investments. When I first started my 401(k), it was a bit nerve-racking. It felt like I warped into the adult world.

    -Christian L. @ Smart Military Money

  • Martin says:

    Great write up. I agree with all your tips, but I would add one more. If you are young (start really early) I believe you can even use leverage or margin to boost your account in early years and deleverage later on. When you are young, you do not have enough money, so you want to leverage it as much as possible. Let’s look at the following example, if you are young and have only 10k saved, you want to use margin to invest 20k if not more, because you will have 30 or more years to deal with any dip. As you get older, you will have saved e.g. 800k but you will only have 5 years for example to deal with dips in your 800k account. So the goal should be to reverse this as much as possible. and have 30 years in 800k account instead of only 5 years.

  • Bucksprout says:

    It’s a relief that more Americans are planning for retirement. Even if you do start a little late there’s still hope! Compound interest and recovering from dips in the market does benefit people who start early. I sense that Americans workers who start late are discouraged because time is not on the their side but there are options out there.

  • @debtblag says:

    I’m doing better than I was before, but not as good as I can be. I’d add one more reason to why you should get started earlier rather than sooner:

    If a year passes and you haven’t maxed out your Roth, you can never go back to that. Also, because you’re not making so much money, you’re getting taxed less, so there’s even more of a benefit to stacking your Roth at that part of life.

  • Dave says:

    I have also started on my retirement plans and also acting on them. Initially I thought of getting an property for investement so that I can live on the rental for my retirement. These are what people have been doing. And probably it seems to be the right path for me as well.

    Probably as ages catches up, I will tend to think more. Actually I may not be able to live off that property rental investment fully until the entire loan is paid up. It requires time.

    Imagine if there is no tenant during my retirement period, does it mean that I am stuck with no cash flow.

    I have been thinking hard and somehow I have straightened out most of my thoughts.

    Dave @ SmartPassiveCashFlow

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