One of the financial goals that you should have is a retirement fund. You need to start saving up for this fund as early as you can. The earlier you start, the more money you can save. You do not want to delay this saving goal because it might be too late to work on it during your pre-retirement years. If you start early, you do not have to put aside a big amount each month. Thanks to compound interest, you can contribute less than $400 a month and still save up to $1 million by the age of 65. At least, if you start at the age of 20 and the expected annual rate of return is 6%. If you start a decade later, like in your 30s, your monthly contribution has to be at least $747.82 – almost double than what if you started back in your 20s.
These calculations are based on a retirement fund target of $1 million. But the question is, will $1 million be enough to retire on after a few decades? An article published on Yahoo.com reveal that this amount may not be enough. At least, if the low rates that we currently have will not improve in the future. The low rates have resulted in low returns for fixed-income investments. If this continues, targeting a $1 million retirement amount may not be enough to retire on.
At the moment, the return is 6%. That means those retiring with $1 million right now can expect $60,000 a year of profit. If this goes down to 4%, that is $40,000 of annual funds for the retired individual. If it goes lower than that, the annual amount that can be withdrawn will also be lower.
3 reasons why you should save more for retirement
The thing is, the low interest rate is something that may or may not happen in the future. However, there are three factors that are currently in effect that should be taken into consideration when you are setting your retirement fund target.
The life expectancy is longer.
According to an article published on USAToday.com, the life expectancy for men is currently at 76 years while women have 81 years. This was based on the data provided by the Centers for Disease Control and Prevention back in 2012. This actually increase in the past few years. You need to take into consideration the increase in years so you can prepare for it accordingly. Not only that, you should look into the life expectancy rate in your family. If your grandparents are still alive at the age of 90s, then that is something that you need to factor in your calculations too. The longer you are expected to live, the more you will need to save for your retirement.
The Social Security system is changing.
There are many changes happening in the pension that people should expect from the Social Security. In the past, it is enough to live on the benefits that you will get from this agency. Now, that is no longer possible. What they can afford to provide as the average retirement income is no longer sufficient – especially since the cost of living continues to rise. This is why private companies are offering retirement plans that will encourage their employees to pursue other saving options. You need to look into the specific package that your employer is offering so you can take advantage of them.
The rising cost of health care.
The health care costs are unfortunately, higher now. The professional fees, medical treatments and other health related expenses continue to rise. Not only that, there are a lot of outbreaks that are threatening the health of everyone. You have to consider these when you are preparing for retirement. In case you are unsure where to start, you can look into the medical history of your family. If your elders have a sickness that is known to be genetic, you may want to research about the costs that will take to have them treated. That way, you can factor in these costs when you are determining your retirement fund.
While these three factors are important, you also have to think about where you will live, and the type of lifestyle that you want to have. Be careful to include all the details so you can come up with a target amount that will keep you from coming up short when you retire.
Calculating the amount that you will target for retirement is not easy but you need to figure out how it is done. You need to do it right because it is very important that you do not outlive your retirement money. If your money runs out and you are still alive, where will you get the funds to support your needs? At that age, you would be too old to work so you can add to your retirement money. You need to keep this scenario from happening at all cost.
Tips to help you increase your retirement money
An article published on Time.com revealed details about the usual expenses of retired individuals. They mentioned how the expenses of pre-retirees are smaller before they reach retirement. At age 55 to 64 years, the spending dropped from $56,000 from the peak spending of $61,000 between the ages of 45 to 54 years. This may be caused by the lower financial obligations that they have. Some of them have finished paying off their loans. Others are no longer obliged to spend for their kids. Since the kids are usually on their own before their parents reach retirement, pre-retirees can downsize their lifestyle. This will result in a lower monthly budget.
When they enter retirement, their spending drops even further to $46,000 (65 to 74 years). As soon as retirees reach 75 years and above, their spending is down to $34,000. It can go up every now and then if they encounter health care costs. These are all based on the data taken from the Consumer Expenditure Survey.
Of course, these are all estimates and you need to consider your own expenses and expectations about your retirement lifestyle. Once you have determined your retirement fund target, you obviously need to start saving more.
The challenge now is how you can increase your savings so you will have more money after retirement. There are many ways that you can do this. You can start by looking for ways that you can save money around the house. Here are some tips that you can do.
- Downsize your house. If the kids have left the nest, you may want to downsize your living arrangements. You can opt to move to a smaller home that is just right for you and your spouse. That should lower your household expenses. If you own your home, you can opt to sell it and buy a smaller house. This should give you some profit. You can use that profit and put it towards your retirement fund.
- Cut back on your expenses. You can check out the different expenses that you are spending on each month. If you have an Internet and cable subscription, you may want to bundle them together so you can get a discount. See what you can remove from your monthly bills so you can free more funds from your budget. You can put that money in your retirement fund.
- Earn more. On one end, you can opt to increase your income to get a bigger disposable income. You can either get a second job or you can ask your employer for a raise. If possible, you can set up a passive income that will allow you to earn extra even as you continue working on your day job.
- De-clutter your life. If you plan on downsizing your home, you will naturally have to get rid of some of your possessions. Sell them off so you can earn from them. You can add the profit to your retirement money.
Whatever money you save can be put in an investment account that can benefit from compound interest. That way, it will multiply a lot faster. Not only that, you should also consider paying off your debts fast. Look into debt consolidation loans or debt settlement to get rid of your credit obligations before you retire. In case all of these efforts will still leave you short, you can always choose to retire later or get a part-time job after retirement. There are a lot of jobs that are ideal for retired individuals. These can help you maintain the standard of living that you want to have without worrying about outliving your retirement money.