By Matthew Loux, criminal justice faculty member at American Military University
We often plan our budgets and spending, but how many public safety personnel actually sit down and plan for retirement? It is imperative to start planning for retirement now. Here are just the few basic questions to ask yourself:
- How much money will you need to retire?
- How long do you expect to live in retirement?
- How much do you need to save each month?
Here are some strategies about how you should start preparing for retirement now.
The first step is simply to start saving. Sit down with your family and talk about your budget. You will need to cover monthly expenses, of course, but you also need to determine your financial goals. These need to include short-term goals, but also your financial goals in retirement. You and your family should always plan together to ensure you are on the same page when it comes to finances.
Know Your Needs
Depending on which resource you read, many experts say you need anywhere from 70 to 80 percent of your current salary in retirement. Let us assume you earn $50,000 per year, you are 35 years old and plan on retiring at age 62, with a life expectancy to age 85. If you want to retire with 80 percent of your income ($40,000 per year) you will need to save $9,869 per year or $379 per bi-weekly paycheck. Let us change it a little bit: If you are 25 years old for the same scenario, you will need to save $5,309 per year or $204 per bi-weekly pay check. This all assumes a pre- and post-retirement return of 5 percent. You can run your own scenario here. The lesson learned? Start saving early.
If your department or organization has a defined pension plan, ask for a benefits statement each year through your human resources department. The statement should be able to tell you what your pension will be in retirement, depending on your years of service, salary, and retirement year. Make sure you find out what the yearly benefit increase will be. The benefit statement should also include any medical, dental, vision, or other benefits offered in retirement. This can provide you with a wealth of information to make your retirement decisions. Do not wait until you are a year out from retirement to ask for the statement.
If your employer has a 401(k), Thrift Savings Plan, or other similar program, contribute to it so you can get the matching funds (if that option is available). Setting up automatic payroll deductions are an easy way to get started. In 2014, you can contribute up to $17,500 in a 401(k) or similar plan with $5,500 in catch-up contributions for those 50 and older. The IRS announced that in 2015, you can contribute up to $18,000 with $6,000 in catch-up contributions for those 50 and older. Let’s assume you are 30 years of age making $50,000 and plan on retiring at age 62. If you invest 5 percent a year with an average return of 6 percent, your ending balance at 62 will be about $269,000. If your employer matches 5 percent, given the same circumstances, your retirement balance will be about be about $538,000, with your contribution still at 5 percent or $2,500 per year. Now that is a good return.
Social Security pays benefits that are on average equal to about 40 percent of what you earned before retirement. In 2014, the average monthly benefit is $1,294 per month. You may be able to estimate your benefit by using the retirement estimator here. For more information, visit their website or calling 1-800-772-1213. You can also use AARP’s calculator without registering.
In 2014 and 2015, you can put up to $5,500 a year into an Individual Retirement Account (IRA); you can contribute even more if you are 50 or older. However, you can also start with much less. IRAs also provide tax advantages, but ask your tax preparer for guidance. You can contribute to either a traditional IRA or Roth IRA. The after-tax value of your withdrawals will depend on which IRA you choose and the inflation rate. Most organizations allow for an automatic deduction from your paycheck to invest in IRAs.
Leave Your Retirement Savings Alone
Do not touch your retirement savings if at all possible. If you do, you will lose principle, interest, tax benefits, and may, in some cases, pay a withdrawal penalty. You should contact your financial planner or tax preparer before withdrawing money from your retirement plan. If you change employers, roll your retirement funds into your new employer’s retirement plan or an IRA. Your human resources department should be able to assist you with the rollover.
I suggest using some good online calculators to determine your saving’s goals, retirement-fund estimates, and how long your retirement savings will last. This will give you the best estimate if you are on track, deficient, or ahead of the curve when it comes to retirement planning. Above all else, set your goals, devise a plan, and then just do it.
In case you are still not sold on how important it is to start planning your retirement now, here are some staggering studies that will hopefully serve as motivation:
- A 2012 study by the Employee Benefit Research Institute found that 30 percent of workers reported having less than $1,000 in savings and investments; 56 percent of workers report they have not attempted to calculate how much money they will need save for a comfortable retirement; and 60 percent of workers report that their total household savings and investments, excluding the value of their home and any defined benefit pension, is less than $25,000.
- Fidelity Investments estimate that a 65-year-old couple retiring in 2013 will need $220,000 to cover medical expenses throughout their retirement.
- According to the Employee Benefit Research Institute, just 14 percent of American workers are very confident they will have enough money to live comfortably in retirement and half of current retirees surveyed say they left the work force unexpectedly as a result of health problems, disability, or getting laid off.
- Social Security only replaces 40 percent of pre-retirement earnings for low earners retiring at age 62.
- A Health and Retirement Study found almost 75 percent of retirees have not saved enough and said they would save more if they could do it all over again. At age 65 and above, Social Security benefits provide more income than any other source for over 60 percent of households, regardless of marital status with the average monthly benefit of $1,294 for retired workers, there appears to be a gap that needs to be filled.
- The Center for Retirement Research found that more than one-third of all households end up with no employee-sponsored retirement plan at all during their entire work lives and others, who move in and out of coverage, end up with inadequate 401(k) balances; 21 percent of workers covered by 401(k) plans choose not to participate; and a typical worker should accumulate about $363,000 by the time he or she retires. According to the Fed, a typical household approaching retirement had 401(k)/IRA balances of only $120,000 in 2010, far short of the projected amount for the individual.
About the Author: Matt Loux has been in law enforcement for more than 20 years and has a background in fraud, criminal investigation, as well as hospital, school, and network security. Matt has researched and studied law enforcement and security best practices for the past 10 years.
Helman, R., Greenwald, M., Copeland, C., & Vanderhei, J. (2012, March 1). The 2012 Retirement Confidence Survey: Job Insecurity, Debt Weigh on Retirement Confidence, Savings. Retrieved October 28, 2014, from http://www.ebri.org/pdf/briefspdf/EBRI_IB_03-2012_No369_RCS2.pdf
Fidelity Estimates Couples Retiring in 2013 Will Need $220,000 to Pay Medical Expenses Throughout Retirement. (2015, May 15). Retrieved October 28, 2014, from http://www.fidelity.com/inside-fidelity/individual-investing/fidelity-estimates-couples-retiring-in-2013-will-need-220000-to-pay-medical-expenses-throughout-retirement
Income and Wealth. http://hrsonline.isr.umich.edu/sitedocs/databook/HRS_Text_WEB_Ch3.pdf
Munnell, A. (2012, July 1). 401(k) Plans in 2010; An Update From the SCF. Retrieved October 28, 2014, from http://crr.bc.edu/wp-content/uploads/sites/13/2012/07/IB_12-13-508.pdf