Thursday, April 17, 2008

Thursday Money Tips - More on Retirement Savings

Each Thursday, Ms. Moneypenny publishes 5 money-related tips. If you have tips, please leave them in the comments, and I will collect them for later use in my blog.

One of the toughest parts of retirement savings is trying to figure out what you will need in 20, 30, or 40 years. I have a tough time with this - I can barely figure out what I want for dinner most days.

Here's 5 tips to get you started down the road of being ready for a time where your only income will be from what you've saved. I'll be writing more and more as I work to refine the approach my husband and I have taken.

1. Save the maximum you can, no matter what
Often this is more than you think you can. If you are not saving a minimum of 10% of your pretax income, you simply aren't saving enough. And that's the minimum. Try for 15%. But if that makes you stressed and worried about loss of income for today, start small. 5% maybe. Then add.

2. Don't depend on Social Security
Our federal government may or may not fix the funding issues with Social Security. Several easy solutions are out there. But the reality is, more people will be retired in a few short years than will be working....and that's a problem. I personally think that by the time I hit 65, income qualifications will be the determining factor in who gets an SS check. So save like it isn't going to be there, and then be happy if it is.

3. Think about the kind of life you want in retirement
Do you see yourself as a snowbird, with a place in Florida and a place in your home state? Relocating? Downsizing? Travelling? Providing daycare for the grandkids? Building your dream house on the ocean?
Then put a price tag on those dreams. If you want to travel to exotic places twice a year, and be able to give your kids money to help them put a downpayment on a house, even if you don't have kids yet and have no idea what trips you want to take - put a price tag on it. Then, you can either run some numbers to figure out how to save, based on estimated earnings - or you can take the easy way out - and save at least 1% of your salary on top of what you currently save for each dream.

Is that a perfect calculation? NO. But it is what I do, and it is simple. I have no idea if a trip to Hawaii will cost $6k or $26k in 30 years, so I'm saving like it's going to cost $26k.

4. If you've made it past 15% of your pretax earnings in savings, consider other options
This could mean IRAs, or it could mean saving in non-retirement vehicles, such as mutual funds. I recommend meeting with a financial advisor and planning with she or he by what you want to do. If you wish to retire at 52, you don't want to lock up all your money into accounts that can't be touched until you are 59 1/2.

5. Make it a plan to pay off whatever house you live in before retiring
Most of us don't live in the house we plan to retire in these days. Some of us do, but many do not. Still, plan to have no mortgage in retirement. Sure, you'll still have to pay utilities, upkeep and taxes, but not having a mortgage will significantly lower your expenses and increase your security. And if it was really needed - you could get a reverse mortgage.

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