Retirement is not a destination but a journey--the accumulation of many steps over many years. Whether retirement is months or years away for you, it's crucial to begin thinking about how you'll support yourself once you're relishing post-employment life.
As a starting point, it's recommended you aim to accumulate at least eight times your ending salary before you retire. That's a rule of thumb based on a variety of assumptions, including market returns, savings behavior, and salary growth.*
To help you gradually achieve this goal, here are six tips to help guide you down a path toward a financially secure retirement. These are not meant to be rigid one-size-fits-all rubrics, but guidelines that to help you achieve your long-term goals.
1. No matter your age, start taking action RIGHT NOW:
For younger people, saving more and acquiring enough equities for growth potential are the most powerful first steps. For older people, delaying retirement for a few years and working part time post-employment improves retirement readiness. Other steps to consider include tapping home equity or annuitizing a portion of your savings and investing the rest for growth potential. The main point here is that you can improve retirement preparedness at any time--if you take action.
2. Aim to save 10 percent-15 percent or more of your income every year.
If you can't afford that much immediately, try stepping it up as quickly as possible, say, 1 percent a year until you hit that target. One way to achieve this goal is by participating in employee-matched 401(k)s.
3. To help you save a little more of your income each year, make sure to use tax-advantaged accounts.
When saving for retirement, it's usually beneficial to maximize the use of tax-advantaged accounts like traditional and Roth IRAs, 401(k)s, health savings accounts (HSAs) if eligible -- when contributions to qualified accounts have been maxed out -- a deferred annuity. The key here is to keep an eye on trading and other investment expenses, which can erode returns.
4. When investing, keep the effect of market fluctuations in mind.
No one knows what the markets will do. But for planning purposes, it's wise to be prepared for adverse market conditions. We recommend constructing a financial plan that can be successful even if investment returns are significantly below average. That way your plan should be able to withstand even an extended period of poor returns. If the market performs better, you may have saved even more than you need, but that's a much better "problem" to have than running out of money. One way to shield your assets from market conditions is to build some inflation protection into your portfolio with investments that can outrun inflation, like stocks, real estate, commodities, and inflation-protected bonds.
Already retired? It's a general rule that you'll need 85 percent of your preretirement, after-tax income in retirement. Two things to keep in mind when you are using your hard-earned retirement savings:
1. Plan on covering essential expenses with guaranteed income.**
Pay for rent, electric bills, and other essential expenses with guaranteed income sources like Social Security, pensions and annuities. That can give you the security to invest the rest of your money for long-term growth. Just be sure not to annuitize more than 50 percent of your savings because you always want some flexibility and access to your money.
2. Be careful not to withdraw too much of your hard-saved money too fast.
As a rule of thumb, we suggest holding withdrawals to no more than 4 percent to 5 percent a year over the course of an average retirement horizon. But remember, your particular withdrawal rate will likely depend on a variety of factors, including your asset allocation, your anticipated lifespan and market performance.
There are many resources available to help you stay on track and accomplish these retirement saving goals. Here are a couple from Fidelity Investments:
Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money.
Before investing, consider the investment objectives, risks, charges, and expenses of the fund or annuity and its investment options. Call or write to Fidelity or visit Fidelity.com for a free prospectus or, if available, a summary prospectus containing this information. Read it carefully.
Stock markets are volatile and can decline significantly in response to adverse issuer, political, regulatory, market, or economic developments. Past performance and dividend rates are historical and do not guarantee future results.
The 85% estimate is a general rule of thumb, and individual experiences will vary significantly. The income replacement percentage estimate is based on Fidelity's guidance and on spending patterns from the Consumer Expenditure Survey 2012 from the Bureau of Labor Statistics.
Retirement Quick Check and Fidelity Income Strategy Evaluator are educational tools.
Actual average annual income increases based on 1.5% real wage increases plus 2.3% inflation adjustments. Also assumes the participant took no loans or hardship withdrawals from his or her workplace plan.
In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk, liquidity risk, call risk, and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so holding them until maturity to avoid losses caused by price volatility is not possible. Changes in real estate values or economic conditions can have a positive or negative effect on issuers in the real estate industry, which may affect the fund. Increases in real interest rates can cause the price of inflation-protected debt securities to decrease. The retirement planning information contained herein is general in nature and should not be considered legal or tax advice. Fidelity does not provide legal or tax advice. This information is provided for general educational purposes only and you should bear in mind that laws of a particular state and your particular situation may affect this information. You should consult your attorney or tax adviser regarding your specific legal or tax situation.
*The baseline 8X hypothetical assumptions are based on: starting age of 25 and starting salary of $40,000; retirement age of 67; pretax deferral rate beginning at 6% and increasing to 12%; annual salary growth of 1.5%; salary replacement goal in retirement of 85%; life expectancy of 92; the account balances grow at a hypothetical expected rate of return of 5.5%. Assumes systematic withdrawal of savings in retirement; 85% replacement rate is for a hypothetical average employee and may not factor in all anticipated future living expenses or needs, such as long-term care costs; dollars expressed are in real dollars (all dollars in 2013 dollars, not future value). All savings are based on pretax earnings, and taxes will be due upon withdrawal.
Investing in a variable annuity involves risk of loss--investment returns, contract value, and, for variable income annuities, payment amount are not guaranteed and will fluctuate.
**Guarantees are subject to the claims-paying ability of the issuing insurance company.
It is not possible to invest directly in an index.
Diversification and/or asset allocation do not ensure a profit or protect against loss.
The Huffington Post and Fidelity Investments are independent entities and are not legally affiliated.
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