When you’re in the workforce, your salary is usually your biggest stream of income. Once you retire, however, those paychecks go away. Have you ever thought about where your money will come from when you’re no longer working? How you budget will depend on your cash flow structure in retirement.
Most people have 3 main sources of income in retirement: A retirement plan (such as a pension or 401(k)), Social Security and their own personal savings and investments. So, let’s break down how each of these income streams works to better understand how they may affect your retirement goals.
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Social Security
When you work, you pay 6.2 percent of your earnings into Social Security and your employer contributes another 6.2 percent. Once you reach retirement age, you can begin collecting Social Security instead of paying into it.
Social Security eligibility is based on two factors: The number of credits earned during your working years and your age. You typically earn four credits for every year you work. Once you’ve earned 40 credits, which usually takes 10 years, you meet the first requirement for Social Security eligibility.
The second requirement is your age. You can start collecting Social Security at age 62, but your monthly benefit amount goes up the closer you wait until age 70.
For example, let’s say your full retirement age is 66. If you started receiving benefits at age 62, you would receive 75 percent of your benefit amount. If you waited until age 66 – your full retirement age – you’d receive 100 percent. If you waited until age 70, your benefit would increase to 108 percent per month.
The maximum Social Security benefit for someone retiring at full retirement age in 2019 is $2,861. The average payout is $1,461 per month. Talk with a financial advisor before you retire to estimate how much your benefits would be per month.
Keep in mind that Social Security benefits were designed to replace roughly 40 percent of your pre-retirement income. That means you should think of Social Security as the icing on your retirement cake instead of the cake itself. While it will provide some income relief in your Golden Years, it probably won’t be enough to live comfortably. That’s where your retirement plan and investments come in.
Retirement Accounts
There are 2 main types of retirement accounts: Employer-sponsored and individual.
Popular employer-sponsored retirement plans include 401(k)s, 403(b)s and pensions – although pensions are quickly fading away. Individual Retirement Accounts (IRAs) come in many forms: Traditional, Roth, SIMPLE and SEP.
Pensions used to be the gold standard for retirement accounts, but they’re quickly being replaced by 401(k) plans. With pensions, your employer was responsible for ensuring you had funds in retirement. With a 401(k), that responsibility falls on you, the employee.
The biggest benefit of an employer-sponsored retirement plan is the contribution match. Not all employers match employee contributions, but many do. According to a study by Fidelity, the average employer contribution match is 4.7 percent. This means that if you contribute 4.7 percent of your annual salary to your 401(k), you receive a 100 percent return on those funds because your employer also adds 4.7 percent.
There are different rules and regulations for each type of retirement plan, so talk with an experienced financial advisor before retiring.
Savings and Investments
This last income stream is two-fold. It involves the money in your savings account and the money in your investment accounts. Your savings accounts typically earn a modest amount of interest. Your investment account, on the other hand, may consist of equities and fixed-income assets. Again, there are different tax stipulations and rules that you may have to follow, so talk with a financial advisor about how your plan is structured for retirement.
Are You Saving Enough for Retirement?
Do you know if you’re on track to reach your retirement goals? Here are 5 ways you can get back on track to achieving your retirement goals if you find yourself far off.
1. Save, Save, Save.
Find ways to increase your income, decrease your spending and eliminate debt. If you’re struggling to decrease spending, consider cutting items you may think you need, such as a landscaping service. If you’re able to make some extra wiggle room in your budget, use the extra money to pay off debt.
2. Make Catch-Up Contributions
You can make catch-up contributions to your retirement plan if you’re age 50 or older. The catch-up contribution limits for 2019 are as follows:
- $6,000 for 401(k), 403(b), SARSEP or governmental 457(b)
- $3,000 for Simple IRA or Simple 401(k)
- $1,000 for Roth IRA
3. Consider Downsizing or Relocating
You may want to relocate or downsize your home in order to reach your retirement goals. Cost-of-living varies greatly from one region to the next. When calculating how much money you need in retirement, consider your location.
If you live in Hawaii, for example, a $1 million nest egg won’t last as long as if you lived in San Antonio because of housing, transportation and healthcare costs. Make sure you research retirement in the area in which you plan to spend it.
4. Push Back Your Retirement Date
You may not want to push back your retirement date, especially if you’ve had your heart set on it. But you may need to adjust your timeline if you’re not able to save more while you work.
If you’re close to reaching your goal and still want to retire when you had hoped, you could pick up a part-time job to fill in the gap. Continuing work also gives you the option of delaying Social Security, which, as mentioned above, increases your monthly benefits.
5. Get a Financial Advisor’s Opinion
Retirement planning is complicated and confusing. You can do all the math and still be unsure if you have enough money to live your ideal life and reach the structure in retirement you had hoped for. Don’t be afraid to reach out to a trusted professional who can help give you confidence and help prepare you for your Golden Years.
This material is provided by PAX Financial Group, LLC. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. The information herein has been derived from sources believed to be accurate. Please note: Investing involves risk, and past performance is no guarantee of future results. Investments will fluctuate and when redeemed may be worth more or less than when originally invested. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All market indices discussed are unmanaged and are not illustrative of any particular investment. Indices do not incur management fees, costs and expenses, and cannot be invested into directly. All economic and performance data is historical and not indicative of future results.
