Saving for retirement

How will you spend your retirement? Do you see yourself travelling the world and eating exotic foods? Playing golf everyday aiming to shoot an eagle on a Par 4 hole? Or, will you find yourself living in your adult child’s basement? According to the U.S. Department of Labor, the average American spends about 20 years in retirement. How will you afford to live the lifestyle you imagine, long after the paycheck stops? The earlier you start saving for retirement, the better off you’ll be, because your money will have more time to compound and work for you. And while you may have more time if you start saving early, it’s never too late to begin saving for your retirement.

How much money will you need?

In order to determine how much you’ll need to save for retirement, you’ll need to consider the following factors: • What sort of lifestyle do you want to live in retirement? • How long do you plan to be retired?

Lifestyle – what percentage of your income will you need to live on? Estimates from financial planners and investment companies vary greatly, but as a general rule you will need to save enough to replace between 70% and 100% of your ending salary. Here’s a few quick examples of how much that adds up to based on three salary levels, assuming you’ll need 20 years worth of that income in retirement: Annual Salary

70% to last 20 years

85% to last 20 years

100% to last 20 years

$ 50,000

$ 700,000

$ 850,000

$1,000,000

$ 75,000 $1,050,000 $1,275,000 $1,500,000 $100,000

$1,400,000

$1,700,000

$2,000,000

One of the things for you to determine is whether you’ll need closer to 70% or 100%. To help you do so, review the following factors and identify where on the sliding scale you fall. I have simple tastes

70% 85% 100%

I have more extravagant tastes

My spending is frugal/conservative

70% 85% 100%

My spending is excessive

I don’t plan to travel often in retirement

70% 85% 100%

I plan to travel often in retirement

I expect to own my home free and clear at retirement

70% 85% 100%

I expect to have mortgage debt at retirement

I expect to be debt-free at retirement

70% 85% 100%

I expect to have some (non-mortgage) debt at retirement

I expect to be in good health through retirement

70% 85% 100%

I’m more likely to have some health challenges in retirement

If you’re like most people, you fall closer to 70% for some considerations, and closer to 100% for others. But hopefully either a pattern emerged or you’re able to conclude that you’re somewhere in the middle and should therefore plan to need to replace 85% of your income. Whatever you do, keep in mind that if you aim for replacing 100% of your income and later change your mind, you’ll be ahead of the game. Conversely, if you’re aiming for 70% and change your mind, it will be difficult and perhaps not even possible to catch back up.

How long do you plan to be retired?

The average American spends 20 years in retirement today – but will you? Do you plan to retire earlier in life, or do you think you’ll enjoy working longer? To get an idea of how long your retirement savings will need to last, subtract the age you plan to retire from your life expectancy. According to the World Bank (worldbank.org), the average U.S. life expectancy as of 2010 was 75.9 years for men, and 80.7 years for women. But keep in mind that both figures have increased by over 7 years since 1960 and there’s no reason to expect they won’t increase by that amount again over the next 50 years. That could make a significant impact on your retirement plan as you may live a lot longer than you might think today. Then again, you may also be healthier longer, leading to an older retirement age. Long story short, if you want to retire younger you’ll need a larger retirement savings (and if you retire too young you may also face tax penalties on withdrawals from certain types of investments). On the other hand, each year longer that you continue to work is a year less that you’ll need to use your retirement savings, which creates a “double-impact” of sorts.

What sort of account(s) or savings program(s) should you use?

Once you have made the decision to start saving for retirement, it is important to know your options and how to start putting money away. You could put money away from each paycheck into a savings or money market account, but these types of accounts don’t typically yield a high rate of return. You’ll likely want to find something that offers a higher yield, tax advantages, or ideally – both. Here are some of the options that may be available to you:

Employer Retirement Plans

Your employer may offer a 401(k) or alternative retirement savings plan. In fact, they may even require you to contribute a portion of each paycheck to it. The diversity of employer retirement plans varies greatly, but if you participate in one, consider doing the following: • Take advantage of employer “matches.” One of the golden rules of retirement savings is not to ever miss out on free money. Many employers will match your contribution up to a certain dollar amount or percentage of income. Find out what your employer matches and make certain you’re taking as much advantage of their matching program as possible. Can you think of any other way to get free money into your retirement savings? • Don’t just accept the “default” savings or investment plan. Many programs have a default plan that will place your investments into a standard mix of instruments (stocks, bonds, cash, etc.). These defaults are often based on a typical new employee

at that company. If you are younger than the typical new employee, this investment mix may not be as aggressive as you want it to be. Conversely, if you’re older than a typical new employee at your company it may be too aggressive. • Take advantage of opportunities to meet with representatives from your plan’s provider. Many providers offer this, but appointment times often go unfilled and workshops are scarcely attended. There are few ways to invest an hour of your time that would produce better long-term results.

• Determine whether or not your participation in the program will be sufficient to generate the amount of savings you’ll need at retirement. Don’t assume that just because you’re participating, it will be enough. You may need other accounts or programs (see below) to supplement your participation.

Individual Retirement Accounts (IRAs)

An IRA is an investing tool or account that is designed to encourage retirement savings through tax advantages. There are several types of IRAs, the most common being the Traditional IRA and the Roth IRA. Contributions to a Traditional IRA may be tax deductible for most people, depending on income, tax filing status and coverage by an employer-sponsored retirement plan. Roth IRA contributions are not taxdeductible, but you are not taxed on qualified distributions or distributions that are a return of contributions. There are a multitude of investments available through a Traditional or Roth IRA. Arizona Federal offers IRA accounts in the form of share certificates of deposit – a conservative investment vehicle that is insured by the Federal Government up to at least $250,000. Other options are available through investment providers that may include stocks, bonds, and other fund types. Such options may offer greater return in exchange for greater investment risk.

Social Security

There is much debate today about whether or not Social Security will be bankrupt many years from now, or if it will remain, but be structured and payout differently. You ultimately have to choose to what degree you believe this valuable benefit will exist when you’re ready for retirement. But in the meantime, why not plan to save enough so that you’re not counting on it? And if it is there when you retire, it becomes a nice bonus. To estimate how much your Social Security benefits in retirement will be (under the current terms of the program), visit www.ssa.gov/estimator. Again, modify your retirement savings goal to the degree you expect the estimate to be accurate.

Savings/Other Accounts

You can certainly save for the long-term or your retirement using any number of savings or investment accounts – money market accounts, certificates of deposit, mutual or index funds, etc. However, unless structured through a 401k, IRA, or other retirement account, there will likely be no tax or other advantage.

As a member of Arizona Federal (one of Us), you have access to the retirement planning services available through Arizona Federal Financial Solutions. You can make an appointment for a complimentary retirement planning consultation by calling (602) 683-1000.

Balance Risk vs. Reward There are thousands of books written about investments, and likely over a million articles and other written documents which you can find within seconds online, so we can’t do this subject justice here. But at a high level, you need to determine how aggressively or conservatively you want your retirement savings to be invested. • If retirement is many years ahead for you, you can afford to be more aggressive and ride the markets out over time with a large portion of your funds in stocks and other equity investments. You’ll likely have periods where you have significant gains, but you’ll also likely have periods of loss. • If retirement is creeping up, you may want to take a more conservative approach with bonds, cash funds, certificates and other lower-risk investments.

Like many things in life, the greater your risk, the greater your potential reward. Regardless of what type(s) of retirement plans or programs you’re using, find out how your money is specifically distributed into different types of investments and make adjustments to your plan as appropriate to match the level of risk (or lack thereof) that you’re comfortable with.

Start yesterday! It’s never too early to start building your retirement savings, and the sooner you do the more you’ll benefit by the compounding of your savings over time. Compounding occurs when the dividends or interest you earn from an investment are reinvested, thus increasing the balance of the investment, the amount on which the next dividend or interest payment will be calculated on, and so on. Here’s a brief example: Let’s say we invest $10,000 in an account with a dividend/interest rate of 4%. At the end of the first year we should expect to have received $400 in dividends/interest ($10,000 x 4%). If we withdraw the $400, and leave the $10,000 for another year, we’d receive another $400 ($10,000 x 4%) at the end of year two. However, if we left the $400 in dividends/interest in the account, we would receive $416 in dividends/interest in year two ($10,400 x 4%). That may not seem like much, but if that reinvestment (compounding) happens every year, it will start to make a significant difference over time.

Tips: • Have your retirement contributions deducted from your paycheck (and into an employer sponsored program or IRA, etc.) before you receive them. That will eliminate any chance you have of doing something else with that money. • When you get a raise, increase your retirement savings by the equivalent amount of the raise (or at least half of it). Put those additional funds aside before you even get used to having them available. • Put unexpected income toward your retirement savings. A tax return, bonus, or other lump sum will make a big impact over time due to the power of compounding. • If you have a retirement plan through your employer and you are leaving the company, be sure to explore your options when it comes to moving your funds. You can consider rolling them into an IRA, or even your new employer’s retirement plan. Just keep in mind that not all plans may qualify for rollover and when you withdraw the funds you must have them in the new account within 60 days to avoid paying penalties. • Review your retirement savings on an ongoing basis – at least annually. In your review process: • Recalculate what you’ll need to retire • Reassess your tolerance for risk vs. reward • Review the allocations of your investments (stocks, bonds, cash, etc.) to make sure they’re still appropriate • Consider what allocations you need moving forward – most plans allow you to keep existing balances/allocations where they are, while you adjust how future investments are allocated • Don’t forget to include your spouse! • It is important that as you continue to save for retirement, you work on your personal savings account as well. You don’t want to have to take a loan out from your 401(k) or pay early withdrawal penalties to replace the roof on your house or to take your family to Disneyland. Review our Creating an Emergency Fund materials to learn how to set aside money for life’s unexpected expenses. • If you feel as though you aren’t in a position to contribute as much as you may need to reach your retirement goals, consider utilizing the tools we have available to help you budget your finances, including FinanceWorks. If you haven’t already reviewed our Thriving on a Budget materials, it may be a good idea to see how you are spending your money and determine what you can do differently to free up more money for your retirement savings.

Need Assistance? Visit any ServUs Center location and ask a Financial Expert to help you get on the path toward saving for retirement. Or, call us at (602) 683-1000 to request an appointment with an advisor from Arizona Federal Financial Solutions.