So, you want to do some retirement planning, but it all looks very complicated. There are numerous ways to save for retirement, and there are a lot of different investment accounts, and so on. You may be wondering if you need a financial advisor or financial planner just to make heads or tails of everything.
Don’t worry. Most of that stuff isn’t necessary.
There are a few facts that will help you develop a rock solid retirement plan for free, in no time at all.
Easy Retirement Planning
Keep in mind that most of the complications that come from talking about things like financial planning or retirement planning come from the fact that there are actually a lot of different people and a lot of different financial situations. But, when it comes to building a retirement plan yourself, or with a professional, the reality is that 90 to 95 percent of people just need a basic retirement plan with no bells, whistles, or complex calculations.
Fact #1: It is almost impossible to save too much money for retirement.
The reality is that most people are very much under-saving for retirement. Fully funding a retirement at a lifestyle nearly equal to the one you have will take a lot of saving and investing, especially if you aren’t in your early 20s. The reality is that it takes compound interest a long time to work, and in the meantime, you just have to save your pants off to build up a big nest egg.
Fact #2: A 401k plan is the best place to save money for retirement.
Again, there are exceptions that apply to a very small portion of the population, but if you didn’t inherit a lot of money, win the lotto, or have some sort of mining rights, the 401k plan is fine for you. You’ll hear a lot made of the fact that a 401k account is tax-deferred, and so you will have to pay taxes on the money when you take it out. It would take a whole article to explain it (maybe I’ll write that next) but the reality is that unless you end up banking big bucks, it really isn’t going to matter. In fact, in order for you to actually have the kind of taxable income in retirement that makes planning for retirement taxes necessary, you’ll have to more than max out your 401k. What matters is getting the money saved. Worry about that first. You can worry about the taxes later.
Easy Do It Yourself Retirement Plan
Ready? Here we go.
Max out your 401k.
Let’s go back for a few reality checks.
Are you currently maxing out your 401(k) contributions?
The maximum standard 401k contribution in 2020 is $19,500. That’s 10 percent of a $195,000 salary, and a full 20 percent of a $97,500 per year salary.
In other words, you have to save quite a bit to max out your 401k. And, since a 401k is the best place to save for retirement, you literally have to do nothing else for retirement planning until you are saving so much money that the IRS won’t let you put any more in your 401(k).
How Much To Save for Retirement?
You want to know how much to save for retirement? You want to know “your number,” or whatever that commercial is talking about? You want to do a complex calculation to determine how much money you need to save to have 80 percent of your current income adjusted for inflation, while taking into account your potential Social Security payments?
O.K. If you like, but there is no need with this easy retirement plan, or with any other.
Remember how I told you that you can’t save too much money for retirement? That isn’t entirely true, but to do so, you need to be one of those people you read about in the paper that reused tin foil and read by candlelight for 30 years and then died leaving a million dollars to the local college. If you are living your life at all, it is very difficult to save too much for retirement.
In other words, the amount you need to save for retirement is: more than you are saving now.
Along the way, you’ll want to live your life though. So, retirement planning isn’t about finding your number, it’s about working to save more and more money for retirement until you are maxing out your 401k contributions. That’s it.
So, if you are saving 5% now, work toward saving 6%, then 7%, and so on. When your life isn’t fun anymore, stop increasing those contributions.
If you don’t believe me, there is some basic retirement calculations here that shows you saving $1,000 per month isn’t enough (that’s 10% of a 120,000 income) and $2,000 probably isn’t enough either. Something like $3,000 per month replaces a six-figure income. Sure, if you make less than that, you’ll need less, but as a percentage, it’s still a LOT of your income to save to retire at your current lifestyle.
In other words, don’t worry about your number or your retirement planning document. Start jamming money in your 401k now. When you max it out, then come talk. We’ll do a real retirement plan.
Until then, you are just doing math for show.