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By Pam Leibfried
This is part 3 in a five-part series on saving for retirement at any age. Check in next Tuesday for information on retirement savings in your 50s.
In Part 2 of this series, we talked about some simple guidelines for retirement savings in your 30s. One of the goals cited was to work toward having retirement savings of twice your annual salary by the time you hit 40 years of age. Once you’re in your forties, you should fine-tune your estimates of what you need to retire comfortably. Having a more accurate estimate of your retirement needs will help you to make any necessary adjustments to your spending or savings rates so you can catch up while there is still time.
How can you estimate your retirement savings needs? The simplest way is to complete a retirement income calculation. These calculations factor in your income, your expected lifestyle when you retire, your current retirement savings or pensions, your estimated income from Social Security and your desired retirement date. They then calculate the amount of retirement savings you’ll need to live that lifestyle over an average post-retirement lifespan and how much you need to save each month in order to get to that goal. Although there are online, do-it-yourself calculators, you’re probably better off to meet with a financial consultant to make sure that the calculations are done correctly and to get their professional advice.
For many of us, the numbers from a retirement calculation are a wake-up call. We can no longer ignore or deny the fact that we are woefully behind in pursuing retirement savings goals. The key is that you use the wake-up call constructively: Rather than despairing that you’ll ever save enough to retire in comfort, you should use your newly calculated goal as a motivating factor to spur your savings. Every little bit you set aside now counts, because it still has a couple of decades in which it can grow and work for you.
But if you’re going to save enough to meet your goals, you have to be disciplined and do some work too:
If you have credit card debt, buckle down and pay it off as quickly as possible. If your debt is significant and you need help in paying it off, consider seeing a credit or debt counselor. For Alliant members, the services of Greenpath Debt Solutions are available for free.
Take the time to look at your spending and find ways to cut back. Could your family take an economical “staycation” this year instead of traveling? Can you join the growing trend of “cutting the cord” by reducing or eliminating your cable package in light of more economical online video services? Could you go out with friends once a month instead of every weekend? Could your friends alternate hosting dinners at home instead of going to a restaurant? Your friends are likely in the same boat as you in terms of needing to save aggressively, so they might welcome a suggestion that helps them to succeed in pursuing their goals, too.
Pay yourself first
It’s a cliché, but it works. If you participate in a workplace retirement program, your retirement savings will happen before funds reach your checking account, so you won’t be tempted to spend more than you should. Or set up an automated payment to go to your IRA every month, so you can’t skip it and spend the money on a non-essential expense.
Prioritize retirement savings
After you’ve paid off credit card debt, your savings priority should be for retirement. If you’re a parent, it’s probably second nature for you to prioritize your children ahead of yourself, but this is one situation where you may have to rethink that mindset. Keep in mind that your child can take out a student loan to fund his or her education, but there are no such loans to fund your retirement. This is an area where the services of your financial consultant can be especially helpful. If you have an accurate idea of where you stand financially, it is easier to know how much you can afford to help your children with college expenses.
Rebalance your portfolio regularly
If you have money in multiple retirement funds, you need to rebalance your fund allocations periodically – quarterly or annually are the most common recommendations for rebalancing frequency – to keep the appropriate mix of stocks and bonds for your planned retirement date. Let’s look at a scenario in which you met with your financial consultant last year and decided that the right mix for your needs is 65% stocks and 35% bonds. You allocated your funds in those proportions in your company 401(k). In the year since then, stocks have gained more than bonds, so when you look at your current account summary, you find that you now have 70% stocks and 30% bonds. In order to keep your target mix of 65%/35%, you need to move some funds from stocks to bonds.
Keep in mind that rebalancing your portfolio does not protect you from risk, as all stock investing involves risk, including loss of principal. And bonds are subject to market and interest rate risk if they are sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price. But routinely rebalancing your portfolio can help to ensure that your investments are appropriate for when you plan to retire, so that you are not a 49-year-old just 16 years from retirement whose investments are more appropriate for a 40-year-old who will be working for 25 more years.
Securities and advisory services offered through LPL Financial, a registered investment advisor. Member FINRA/SIPC. Insurance products offered through LPL Financial or its licensed affiliates. Alliant Credit Union and Alliant Retirement and Investment Services are not registered broker/dealers and are not affiliated with LPL Financial. The financial consultants of Alliant Retirement and Investment Services are registered representatives of LPL Financial. The LPL Financial Registered Representatives associated with this site may only discuss and/or transact securities business with residents of the following states: AK, AL, AR, AZ, CA, CO, CT, DC, DE, FL, GA, HI, IA, ID, IL, IN, KY, LA, MA, MD, ME, MI, MN, MO, MS, MT, NC, ND, NE, NH, NJ, NM, NV, NY, OH, OK, OR, PA, RI, SC, SD, TN, TX, UT, VA, VI, WA, WI, WV, WY.
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