A guide to saving for retirement: making a plan

12/20/2016 12:05 pm ET Updated Feb 16, 2017

As an advisor, I often read articles highlighting Americans’ lack of retirement planning today. Interestingly, a recent Voya Financial survey found that 63 percent of people think they spend too little or no time at all making decisions related to the retirement plan process. Additionally, 37 percent would rather wait in line at the DMV than research or review their plan options. While this might be eye-opening to many, I’m not surprised to hear this. I’ve been working in the financial services industry for the past 30 years and it continues to surprise me how little we, as consumers, are taught about money, taxation and financial planning.

Creating a plan for retirement is a crucial step to mapping out your entire financial picture. But, where do you begin? One of the first steps I tell my clients is to estimate their cost of living in retirement. This is especially important because most often you will no longer be bringing in a paycheck. Once you have this figure in mind, it can help solve how much money you’ll need to save in order to support this cost – and start planning!

So how do you go about doing that? To start, there are some questions you’ll need to ask yourself. What will your future medical costs looks like? How will Medicare benefits apply to you? Will you need long-term care insurance? Where will you live? Some of these answers might come to you after evaluating local and state income taxes, property and sales taxes, as well as health care costs. To help, try utilizing online tools like Voya’s myOrangeMoney®. This interactive educational experience allows individuals to select their expected retirement state of residence and calculate how the estimated cost of health care in that state could impact their retirement income. Fine-tuning your cost projections will be a key factor in getting your retirement plan on the right track.

If retirement is still decades away, you might be wondering how to determine these costs. To get a rough understanding, I’d recommend looking at your current cost of living and inflating that number by 3 percent, to the age of 70. This will give you a good estimated target. Continue to refine these projections as you age and get closer to your retirement. The most important thing to remember is, don’t wait! While time is on your side, it’s a good idea to have a strategy in place, no matter what your age.

Next, look at how much you should be saving to help manage your future living expenses. As a financial advisor, there is one golden rule I follow when it comes to retirement planning: start by saving at the workplace through an employer plan and make sure you’re maximizing those benefits. For example, let’s say your employer is matching 100 percent of the funds you put into your workplace savings plan, up to 3 percent. To make the most out of this match, make sure you’re putting away at least 3 percent of your gross pay into that plan.

In addition to an employer plan, look for other tax-advantaged opportunities. If you’re eligible for a Roth IRA and have the money to contribute to it, I would recommend you open one. This type of retirement savings vehicle allows you to invest after-tax dollars. If you’re not eligible for a Roth IRA, see if your employer’s plan has a Roth component you can take advantage of. Depending on your effective tax rate, you may want to consider the potential for generating what is typically Federal income tax-free money in your retirement plan.

The other key factor to consider here is the power of time and compounding interest. By investing early, your money could have a better chance to grow over the long-term. To help factor this into your savings you’ll need to pick a hypothetical compound rate in order to project your growth until retirement. My recommendation is to be conservative. If you think you might earn 5 percent, plan at a 4 percent growth rate. It’s better to underestimate your projections as actual investment returns are not guaranteed and will vary from year to year.

As you’re going through these essential planning steps, don’t be afraid to look to a professional for help. A good financial advisor will work with you to develop an effective holistic financial plan. This will include identifying short- and long-term goals, finding a retirement income strategy, and developing the right course of action to help you become ready. By utilizing an advisor, they can help guide your plan to work even more effectively for retirement.

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