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Lesson’s with an Accountant “Retirement”

Today on Lesson’s with an Accountant I am discussing Retirement.

If you are anything like me you are looking forward to Retirement.
I have a long list of things I want to do, places to travel, etc.

Disclaimer: I am an Accountant but not a CPA, please consult your CPA before making any financial decisions.

I posted the question on IG, What questions do you want answered on this series.
There were some great questions.  Budgets was the top concern, which I covered here.
Another reader posed the question “What percentage should we divide our income for savings, retirement, and recreation (travel, etc)?”

First, what a great question!  Retirement is something we all want to enjoy but sadly put to the bottom when it comes to our budgets and finances.
“A retiree who earns an average of $63,000 per year before retirement should expect to need between $44,000 and $57,000 per year in retirement” source

So how do you set aside $44k for each year you are retired?
First, we need to look at what age you will retire and the typical life expectancy of people in your family.  There are many calculators out there that can help you get a better idea of what this will look like for you and your needs.
My family, for example, tend to live well into their 90’s.  Looking closer my mother waited until full Social Security Benefit age of 70.5 to retire.  This means I would need 20-30 years of funds for retirement, at 25 years that comes to $1,100,000!  Scary but not impossible!

If your company offers 401(K), I recommend signing up for it and contributing a percentage [$18,500 is the max per year according to IRS standards].  The percentage needs to be based on what you can afford, however experts say between 10 to 20% of your annual income each year.  Keep in mind a 401(K) account is taken from your salary pre-tax which will lower your overall tax obligation.  No matter what your retirement account should be funded before any other obligation.  If you don’t start now, then you won’t have funds when you do retire to pay for basic necessities.

Next, Savings…..You should have 6 months of expenses in savings in case of an emergency.  So if your monthly expenses total $3,000 you will need $18,000 in savings.  I know this sounds like a lot, but in the event you loose your job, have a medical emergency, etc this will be a necessity.  I recommend starting small.  If you live on a tight budget, like I do, then I suggest $20 to $30 each paycheck in a savings account that is difficult to pull money from [i.e. at a separate bank not linked to your checking].  If you and your spouse follow this rule you could save $80 per month, which adds up to $960 per year; if you only save $20 per check.  Then you can cut back on things, like that $4 cup of coffee or the $10 daily lunch.  Things add up quickly, so take a look at what you are really spending your money on and see how you can cut back.   As you get your budget more refined then you can increase this to $50 or $100 per paycheck.  The point here is to not cause yourself financial stress while saving, but to grow your savings.  This may take you 2 or 3 years to grow to the full amount, that is alright.  Slow and Steady wins every time.  Make sure you shop around for a good bank.  Many have promotions and offer good interest rates on new savings accounts.  You want a good return on the cash you are saving.

Last, Recreation……I covered this in the budget post.  Give yourself time to plan a vacation, this will allow you to budget accordingly.  If you know you want to visit the beach start looking at Airbnb’s that you can book a few month’s in advance.  Where I think vacations are beneficial and fun, if you are tight on your budget this is an area you can cut back on.  Find ways to vacation with other’s to cut on lodging.  Check with family and friends for free options.  I love going to visit my Aunt for a vacation, I can stay for free and she usually cooks me one good meal.  Your priority should always be focused on staying financially stable now and in the future.

I suggest consulting with a Financial Adviser.  They can help you create a plan that works for your needs.  Check with your friends or church for trusted local advisers.  Many will offer a free consultation and lay out where they can help you and what, if any, fee’s are associated with their services.

I write this blog for you, so please leave questions in the comments or email me directly if there is a topic you would like me to cover.