Depending on where you are in life, trying to anticipate your financial needs in retirement and determining how exactly to get to that point could feel like a daunting task, or even a task that doesn’t need tackling yet. In fact, according to a study completed by The Alliance for Lifetime Income, only 28% of non-retired Americans have attempted to estimate their retirement income. Not as intimidating as it sounds, read on to learn how to estimate those needs.
Start with Your Current Income
If you’re living within your means and not depending on credit cards to maintain your lifestyle, using your paycheck as a benchmark is a sufficient starting point. This, of course, excludes contributions to a traditional 401(k) account as well as health insurance premiums that are deducted from your gross pay. A common and simple approach, then, is to set your desired annual retirement income at 60% to 90% of your current income. However, it doesn’t take a financial expert to note potential flaws with this approach. What if, for example, you plan to travel extensively during retirement? Planning for 60% to 90% of your current income might not be enough to fulfill your jet setting goals.
Forecast Retirement Expenses
Your annual retirement income should be more than enough to meet your daily living expenses. Keep in mind that the cost of living will increase over time, and insurance and health care could fluctuate. Having said that, some common retirement expenses to estimate include:
- Food and clothing
- Housing (mortgage, homeowners insurance, rent, property updates, repairs, etc.)
- Transportation (car payments, insurance, maintenance, gas, repairs, public transportation)
- Insurance (medical, dental, life, etc.)
- Health care costs not covered by insurance (deductibles, copayments, etc.)
- Debts and loans
- Recreation such as travel, hobbies, and dining out
What to Do with Your Projected Retirement Income Needs?
A standard rule of thumb when talking about estimating retirement income needs is to have 25 times your anticipated annual expenses saved up by the time you retire. This is assuming you’re planning for a 30-year retirement. Theoretically, you could then withdraw 3% to 4% of your nest egg each year.
If you’re lacking additional sources of protected lifetime income, such as pensions or annuities, you may need to tap into savings in order to bridge the gap between social security checks and what you’ll need to live on. You could also buy a simple income annuity to cover part of that funding gap. These payments continue for life, thereby removing some of the guesswork of estimating retirement income needs and providing peace of mind.
Most small businesses have limited financial resources, so managing funds wisely and intentionally is crucial to the success of the business. Below are ways in which your small business may be throwing away money that could be needed elsewhere.
Having Overheads that Exceed Profit
It might be common sense, but if you’re not making enough profit to cover your expenses, trouble is on the horizon. Even entrepreneurs can be financially-challenged, so it might be worth it to enlist the help of an accounting professional. Additionally, you should identify the most profitable aspects of your business as well as the ones that are draining resources, and make adjustments however needed.
Consider whether your full-time staff is absolutely needed. Could some positions be just as effective in part-time, seasonal, or freelance roles? Too, make sure you’re tapping into your employees’ full potentials. Get to know their interests and individual areas of expertise in order to increase productivity, propel your business forward, and offer new ways to motivate employees to take a vested interest in the success of your business.
Advertising and Marketing Expenses
As a small business owner, you likely don’t have money to waste on untargeted marketing or costly advertising campaigns. Your best bet is probably content marketing, a.k.a. blogging on your website. Brush up on SEO – or tap into the unidentified skills of your employees – to make sure your posts are keyword-optimized and pop up in search engines. Not a writer? Again, tap into the skillset of your employees, or hire a freelance writer. Lastly, think about finding someone to manage your company’s social media accounts and Google ad campaigns.
Trade Shows and Conferences
Though they’re a great way to network while promoting your products or services, they’re often expensive. When funds are tight it’s wise to be choosy about which ones you attend. If one or two specific trade shows or conferences have proven to produce sales and benefit business, just concentrate on having a presence at those venues and forgo the ones that might not be worth the cost.
The Latest Technology
In most instances you really don’t need the latest and greatest that technology has to offer. For example, if you buy a sophisticated software program that requires outsourced labor at a significant cost just to maintain simple records, you might want to rethink whether such a costly program is worth it. Cloud-based services are available to small businesses at low to no cost.
Weak Expense Tracking
If your love as an entrepreneur is building new products, or networking and finding new clients, tracking expenses is likely something that falls on the back burner. Finding a detail-oriented and trustworthy employee to handle this task will benefit your company’s bottom line – and free you up to focus on your strengths. And on your employees’ end, if they know someone is keeping tabs on their spending, they’re likely to be more frugal with company expenses.
Credit Cards and Insurance
Routinely keeping credit card balances in check might seem like a menial housekeeping task, but with interest rates almost always greater than 20 percent, failing to pay your credit cards in full each month is a costly mistake for a small business. Likewise, be sure you’re getting the lowest possible insurance rate for your company to avoid excessive costs. You might also benefit from an independent insurance agent who can go to bat for you when you’re hit with a claim.
You don’t need a high-bracket income when it comes to saving more for retirement. What you need, regardless of income level, is discipline. The following tips can help average workers save more and build the kind of wealth that will support them after leaving the workforce.
Automate the Process
A lot of employers offer the option of diverting a percentage of your paycheck directly into your 401(k) account. This takes the guesswork and mental energy out of saving for retirement and puts the process on autopilot. And employers will often match your contribution up to a certain percentage.
Contribute to an IRA
If you don’t have access to an employer-sponsored account, or want something in addition to your 401(k) account, you might think about opening an individual retirement account. You can contribute up to $6,000 per year ($7,000 for those 50 years and older) to an IRA. Keep in mind, while single employees are able to contribute the maximum to a 401(k) and an IRA in the same year, married couples may have some limitations if both participate in a work-sponsored plan. The rules may also be slightly different for a Roth IRA account.
Part-time gigs and side hustles are more popular than ever thanks to the internet and smart phones. If you’re diligent with saving the earnings from a secondary income, it can grow over time. You can also use the funds from side gigs to pay off debt, which will open up your budget to allocate more for retirement savings. For example, bringing in an extra $100 a week equals out to $5,200 a year. From selling your possessions on eBay or Facebook Marketplace to offering a service such as dog walking, car detailing, or tutoring, the possibilities of earning extra income are dependent upon your time, talents, and abilities, but the monetary results have real potential to make an impact on your financial future.
According to a 2016 study by U.S. Bank, nearly three out of five American families don’t utilize a budget, but a planned budget can cut down on excessive spending and keep your finances in check on a weekly or monthly basis. Impulse buys (no matter how large or small), add up, as do regular dinners out, pressure to keep up with the Joneses, and unforeseen expenses that crop up here and there. Without a budget and a plan for dealing with the unexpected, it won’t take long for your financial grip to unhitch, sometimes leading to seemingly unsurmountable debt. And debt has the power to undermine your retirement savings potential, either temporarily or for much longer.
With free online budgeting plans, myriad ways to earn some extra income, and a commitment to saving, almost anyone can make saving for retirement an attainable goal.
With the overwhelming amount of pressure and decisions to make when starting a small business, stress can cause even savvy industry gurus to fall for common startup mistakes. In the best scenarios, mistakes will set you back a bit, but in worst-case scenarios, they can hurt your potential and outlook for long-term success. Below are common startup mistakes that can have a negative impact on your small business.
Miscalculating Startup Costs
The perils of starting a business with an insufficient budget, or an underestimated one, can be a shot in the foot before you even get running. Plan to have at least six months’ worth of income in the bank before officially cutting the ribbon to open your business. This will give you some time to get up and going, garner some clients, and generate invoices and payment.
Neglecting to create a marketing strategy
Most new businesses are going to have to put some brain power and cash behind a good marketing plan, and this should be done well in advance of turning on the lights for customers and clients. These plans should include online, offline, social media, and any other means of marketing to get the word out. Will marketing and social media be outsourced, will you handle it personally, or will you bring someone on board to solely handle this task?
Failing to be frugal
Whether through a bank loan, a generous loan from a relative, sales of your own assets, or years of saving your own money, you’re going to have some capital to spend on rent, equipment, products, employees, etc. Keep in mind that profits won’t roll in overnight. Spend your savings wisely, do your research, and make your money stretch.
Thinking you can be a one-man operation
Even if you’re a one-man or one-woman business in the beginning, you’ll need people in your corner. You’ll inevitably want to shoot around ideas with someone; you may need someone, even on a very part-time basis, just to handle invoices and office files; you’ll want feedback, advice, and even potential contacts. Consider if it makes sense for your business to create a board of advisors.
Many workers dream of retiring early. Not everyone has a choice in the matter, but if you do, there are some disadvantages and challenges to be aware of. Even if you can afford to retire early, you might not want to.
Here are some disadvantages to be aware of when it comes to early retirement.
Savings in a traditional IRA or 401(K) can’t be withdrawn without penalty before age 59 ½, so in order to retire earlier, you’ll need to have enough savings in a traditional bank or brokerage account to cover your costs until then. As for social security benefits, you’re allowed to start claiming benefits at 62, but that’s before full retirement age, so claiming early could result in a permanent reduction in benefits (i.e. if your full retirement age is 66 and you claim benefits at 62, you’ll reduce your payments by 25%).
Medicare eligibility doesn’t kick in until age 65, so retiring earlier than that means having to absorb the cost of health insurance independently. If you retire with just a few months to go before Medicare kicks in, you have the option of obtaining short-term coverage, which helps pay for catastrophic medical events but doesn’t typically cover preventive care or pre-existing conditions. If you’re looking at a longer stretch between retirement and Medicare eligibility, you’ll need to shop around for major medical insurance. These plans are the most comprehensive for early retirees and cover a broad range of medical care, from doctor visits to major surgery.
Early retirees can have a difficult time adjusting to an unstructured schedule. With high levels of energy and drive, and a strong desire to still be productive, they risk sinking into boredom and depression as they progress deeper into retirement. Increased anxiety, dementia, and cardiovascular disease have all been linked to health risks of early retirement as well. For this reason, it’s a good idea to keep an open mind about returning to work should you start to feel that early retirement wasn’t as fulfilling as you’d hoped.
Though there are some things to think about before retiring early, with careful planning and goal setting, you can make it work. It’s best to begin saving consistently (and early) – in a Roth IRA or traditional 401(K), but also in a nontraditional retirement plan so that you can have access to those funds before age 58 ½. Financial planners advise to save 30% of your income, as opposed to the conventional target of 10% or 15%. And transfer all tax refunds and bonuses into your nest egg as well. In short, cutting out your daily coffee house latte isn’t going to get you to early retirement.