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Financial Planning and Retirement

Will You Be Financially Ready to Retire? 5 Steps to Help You Get on Track

    • rizvi-barbara-headshot-2024.jpg
    • Barbara Rizvi, CFP®

      Director, Financial Planning
      Nov 01 2018

Article | Read time: 6 minutes


Retirement – it’s the finish line to your long career. It also marks the beginning of more leisure time to be spent on hobbies, with family and friends and fulfilling life-long dreams. When you retire is not only determined by physical and mental readiness, but financial readiness too. Without the latter, a long-anticipated retirement could be short-lived. Following, and sticking to, these five simple tips will help ensure you reach your retirement goals and enjoy your golden years.

1. Determine How Much You’ll Need to Cover Your Retirement Lifestyle
The first step to help ensure you are financially ready for retirement is to determine how much money you will need to save in order to meet your desired lifestyle in retirement. This may seem pretty elementary but according to First National Bank of Omaha’s 2018 ‘Retirement in America’ survey, 69 percent of respondents who have yet to retire have not calculated how much money they will need for retirement. “Guesstimating” your retirement budget or “just winging it” could have disastrous effects on your lifestyle in retirement and could result in you being forced to go to back to work.

As a general rule of thumb, you should save enough to live on anywhere from 75 to 85 percent of your annual pre-retirement salary. Of course, that number varies depending on the extent to which you plan to maintain your pre-retirement lifestyle. Create your retirement budget by taking your current annual expenses and adjusting for any foreseeable changes to your lifestyle such as downsizing your home, increased travel expenses, changes to health insurance costs, etc. Subtract your projected expenses in retirement from any guaranteed sources of retirement income (Social Security retirement benefit, pension, annuity payments). This is the amount of annual expenses you must fund with savings. Multiply this amount by the number of years you expect to spend in retirement. That’s a general idea of how much you should plan to save before you retire. As income taxes both prior to and during retirement can have a material impact on which retirement savings options are best suited for you and how much you need to save for retirement, at First National Bank we recommend you work with a financial planner to develop a retirement savings goal that is unique to you.

Next, create a plan on how you will save enough to reach your goal. There are many factors that influence how much you need to save each month, such as number of years until retirement, the number of years you plan to be in retirement and the rate of return on your savings. A retirement calculator can help you determine what you need to save in order to get there.

2. Start Saving Early
If you haven’t started saving yet, you aren’t alone. The ‘Retirement in America’ survey revealed that 19 percent of retirees were older than 50 when they started saving for retirement and 16 percent were between 41 and 50. However, when it comes to saving for retirement, the earlier you start, the better, due to the compounding effects of interest. With compound interest, you not only earn interest on the money you save each month, you also earn interest on top of the interest you already earned! Many Americans—retirees themselves as well as people who have yet to retire—are not taking all the steps they can that will ultimately allow them to make the most of their golden years. The reality is that the earlier you start planning, saving and thinking about retirement, the more you’ll be thanking yourself down the line. To demonstrate why, consider the example below that shows the value of compound interest and how the age at which you start saving makes a huge impact on your savings by age 65. Assuming you invest $250 each month with a 6 percent average return on investment:

  • at age 25: You'll accumulate $497,873 by age 65
  • at age 35: You'll accumulate $251,129 by age 65
  • at age 45: You'll accumulate $115,510 by age 65

Starting at age 25, you will save a total of $120,000 out of pocket. Starting at age 45 you will save a total of $60,000 out of pocket. However, by starting at age 25 you could earn $377,873 in interest by age 65 while starting at 45 years old you may only earn $55,510. The 20 additional years of saving only $250 per month results in a $382,363 total difference in savings, due in large part by the compounding effects of interest!

3. Pay Off Debt
Paying off debt, no matter how much you owe, is another key step to ensuring you meet your retirement savings goals. According to a recent study by NerdWallet, the average American household with credit card debt owes $15,432. In addition to the monthly principal payments, those same households are paying an average of $904 in interest payments each year. That’s $904 that could be placed into retirement savings. The ‘Retirement in America’ survey further revealed that 37 percent of current retirees are still paying off a mortgage, 29 percent are paying off auto loans, 15 percent are paying off medical debt and 8 percent are paying student debt. Working to eliminate debt in your working years while also saving for retirement will help free up your post-retirement income for other things such as travel, spoiling the grandkids and hobbies.

4. Understand Your Total Retirement Package and Monitor It Regularly
Your total retirement package is composed of all of the sources of income that you expect to receive in retirement. Retirement packages will vary by individual but generally consist of a combination of personal savings accounts and certificates of deposit; retirement savings accounts such as 401(k)s and IRAs; brokerage investment accounts; pensions; annuities; and social security. Be sure to understand the rules and tax implications for withdrawing from each of these sources and how each will fit into your total retirement income stream.

Likewise, if any part of your retirement package is likely to experience market fluctuations, as is the case with investments such as stocks, bonds and mutual funds, it is important that you monitor its performance regularly and make changes to your investment strategy as your proximity to retirement and your tolerance for market volatility change. This is true whether you have already retired or are yet to retire. According to the ‘Retirement in America’ survey, only 22 percent of retirees check their investment portfolio monthly, 19 percent check it quarterly and 4 percent never check it. Steep market changes in either direction can make an impact on your total retirement savings. If not managed correctly, your savings could end up short.

5. Plan for Health Insurance Coverage
Nothing can derail your retirement plans like a serious health issue, and without adequate health insurance, it could eat up your retirement savings too. More often than not, once your employment ends, so does your employer-sponsored health insurance coverage. Even if your current employer says they will cover your health insurance in retirement, that doesn’t mean they won’t change their mind in the future. The good news is if you’re 65 or older when you retire, your Medicare coverage will kick in.  But if you happen to retire before age 65, you will need to find and pay for your own health insurance coverage. There are out of pocket costs associated with each scenario including premiums, deductibles, co-pays and prescriptions that will factor into the amount of income you will need for retirement. Be sure to shop around for the best prices for your needs.

With a little planning and foresight, you can help ensure that you are financially able to retire when you are physically and mentally ready. A First National Bank Wealth Management Advisor can help you get on the right track today. Click here to learn more.

About the Author

Barbara is a Senior Financial Planner with the Private Client Advisory and Financial Planning teams at First National Bank Wealth Management. She specializes in providing comprehensive and personalized financial planning that incorporates investment, retirement, tax, protection and estate planning strategies.

This material does not constitute legal, tax, accounting or other professional advice. Although it is intended to be accurate, neither the publisher nor any other party assumes liability for loss or damage due to reliance on this material.