How Can I Start Saving for Retirement?

Dr. Daniel Crosby, Ph.D., President, IncBlot Behavioral Finance

Building a retirement savings plan is a lot like building a home. You count on your house to provide shelter and to weather the occasional storm. It requires high-quality materials if it’s going to be built to last. Your retirement savings plan is the same. Your retirement savings plan starts with personal diligence. These financial building blocks will help you get started on the rest.

• Household Budget: Do you know how much to save for retirement? The Employee Benefit Research Institute’s 2013 Retirement Confidence Survey reported 33% of households think they need to save 20% or less of their income; 20% set their target between 20-29%, and 23% planned to save 30% or more of their income. Nearly one-fourth of respondents said they didn’t know how much to save. What do you budget for long-term retirement savings? Chances are you’ll face trade-offs between the everyday cost of living, paying down debt and saving for your child’s college education. Commit to a set percentage or amount on a regular basis, and adhere to your plan.

• Employer-Sponsored Plans: The IRS has defined the 401(k) contribution limit as $17,500 for 2013. Read the program requirements for your company’s 401(k) plan carefully. How much of your salary are you allowed to contribute, and what is the match – if any – offered by your employer?  Ask questions about the vesting schedule, which defines how long you must work for the company in order to keep the full matching contribution from your employer. As concerns about the adequacy of Americans’ retirement savings continue to grow, many employers are implementing auto enrollment and automatic escalations of the percentage that plan participants are saving in their employer sponsored retirement plans.

Don’t forget to give the investment options offered by your plan a thoughtful review. Do they offer both aggressive and conservative options? Are there funds that fit your investing goals? Consider asking your plan sponsor to expand the number of options available.

• Individual Retirement Accounts (IRAs): In addition to building your nest egg, IRAs offer tax advantaged savings for retirement. Your tax advisor can recommend the best form of IRA for your situation; choices range from traditional IRAs to Roth IRAs, SEP IRAs (for self-employed individuals or small businesses) and SIMPLE IRAs (Savings Incentive Match Plan for Employees). In 2013, the IRS defined the IRA contribution limit as $5,500.

• Rollovers, Transfers and Conversions: Did you leave a retirement account with a former employer? “Out of sight, out of mind” applies to retirement accounts too. If your funds aren’t in an account that you can actively manage or contribute towards, you may be missing out on key investing opportunities. Do you have the IRA that is the most beneficial for your tax situation? Consult with your tax advisor to ensure you’re contributing to the accounts that are the best fit for your financial situation.

• Catch-Up Contributions: Individuals aged 50 and older can make additional contributions to their 401(k) or IRA to offset a late start at retirement savings. In 2013, the IRS allows for an additional contribution of $5,500 to 401(k)s and $1,000-$2,500 additional contributions to IRAs depending on the type of IRA and your level of income (phase outs may apply).

Working with a trusted financial professional may help you to maximize your choices. Together, you may find the right building blocks for your retirement future.

Sources:

Department of Labor, “Top 10 Ways to Prepare for Retirement”.

Employee Benefit Research Institute; 2013 Retirement Confidence Survey, 2013 RCS FACT SHEET #3  and March 2013 Issue Brief.

IRS.gov

2013-8464

This material is intended to potentially assist you in planning for your future. Guardian and its affiliates, subsidiaries, employees, agents, and outside contractors, including but not limited to Dr. Daniel Crosby, are not authorized to provide legal, tax, or investment advice in the materials of this website including but not limited to any blogs. The information provided does not constitute a solicitation of an offer to buy or an offer to sell financial or insurance products. Please note that individual situations can vary, and you should consult your tax, investment or legal advisor for guidance and information specific to your situation. Guardian is not responsible for the consequences of any decisions or actions taken in reliance upon or as a result of the information provided by this material. To learn more about Guardian, visit GuardianLife.com.

When Should I Start Saving for Retirement? #money #retirement #saving #life #Merry Christmas

Dr. Daniel Crosby, Ph.D., President, IncBlot Behavioral Finance

Knowledge is power when saving for retirement. Many experts simply advise, “start saving now,” and “save as much as possible.” Yet, fewer than half of all Americans have taken the time to develop an estimate for retirement savings. Which half are you in?

Saving for retirement early is key, but understanding why and to what end are even more important. A National Bureau of Economic Research study on financial literacy and retirement revealed a tool as simple as a low-cost, direct-mail campaign could motivate a recipient to make an average increase of $1,150 in annual contributions.

A further study anchored goal-setting to simple, turn-key retirement communications. Employees at a large technology firm received one of two types of email messages reminding them about the opportunity to adjust their 401(k) contribution rate before the end of the year.

The first group received a generic message reminding them to take advantage of a company match in contributions. The second group received a customized message that tied their personal contribution to a specific outcome: “For example, you could increase your contribution rate by 1% of your income and get more of the match money for which you’re eligible…” The employees received various ‘goal’ percentages. The mention of higher savings goals raised income contributions by as much as 2.2%, while lower or no goals had little to no effect on increasing contributions.

In short, an educated saver will save more and will save for specific reasons.

What’s your end game?

The conscious decision to start saving for retirement is shaped by your goals for retirement living. Your current lifestyle likely influences your expectations for retirement. So, what level of income do you need to maintain a similar lifestyle, or one that is slightly scaled back (to account for less space, transportation and spending needs)? That figure is your replacement rate. In other words, how much retirement income will you need to replace the lifestyle and income you’re used to throughout employment? While the Department of Labor recommends an 80% replacement rate, others hover around 70% in order to maintain a similar lifestyle pre- and post-retirement. As of 2013, Social Security will generally provide around 40% of your replacement income for current retirees. But, how will you account for the rest?

What’s happening around you?

Savvy planners know that retirement is in their own hands and not anyone else’s. While you will likely draw some form of Social Security benefits, the amount of these funds available will almost certainly change over time. Currently, Social Security benefits are calculated using an average of your earnings (after a minimum point threshold is met). As the number of Baby Boomers continues to place a strain on this program, it becomes more likely that the payouts will change. Similarly, if your employment contract includes a defined benefit pension plan, be aware that those payments are never fully guaranteed. Whether your retirement horizon is 5 years or 30 years away, stay informed about workplace retirement plan policies and Social Security regulation changes. This information is important to review as you shape the composition of your retirement income and your saving strategy.

So, when is the best time to start?

Older Americans who approach retirement without sufficient savings can make up for lost time by taking advantage of ‘catch-up’ contributions over and above certain ordinary thresholds. Younger Americans have time on their side. No matter your age, saving for retirement is about bridging the replacement income gap. What have you saved, and what do you still need to provide for the retirement of your dreams?

Measuring the gap lays the foundation for your retirement saving strategy.

Be sure to consult with a financial professional who can discuss retirement planning in more detail.

Sources:

National Bureau of Economic Research. “What Will My Account Really Be Worth? An Experiment on Exponential Growth Bias and Retirement Saving.” March 2012 Paper.  February 2012 Paper. 

2013-6094

This material is intended to potentially assist you in planning for your future. Guardian and its affiliates, subsidiaries, employees, agents, and outside contractors, including but not limited to Dr. Daniel Crosby, are not authorized to provide legal, tax, or investment advice in the materials of this website including but not limited to any blogs. The information provided does not constitute a solicitation of an offer to buy or an offer to sell financial or insurance products. Please note that individual situations can vary, and you should consult your tax, investment or legal advisor for guidance and information specific to your situation. Guardian is not responsible for the consequences of any decisions or actions taken in reliance upon or as a result of the information provided by this material. To learn more about Guardian, visit GuardianLife.com.