Making the Savings Trade-Offs and Determining "Where" to Save
After you have identified your time horizon for retirement, your needs and resources and thus your lump sum savings target, it’s time to come back to the present and use that information to assess your savings.
- What are you setting aside out of your paycheck?
- What is accumulating in your bank account?
- What’s being set aside on your behalf by an employer or matched through a company retirement plan?
- Based on the math you just determined, are you on pace to meet your goal?
There’s no way around it. In the absence of company pensions and more meaningful Social Security checks, the onus is on you to save for your own retirement. Even if you have a pension or strong Social Security resources, as we discussed before, they probably won’t keep up with inflation over time. So you have to save. And better to know those numbers now before you retire.
Hence, this is typically the variable in the planning process that is usually defined for us. If you determine your time horizon for retirement, your needs and resources and thus your lump sum savings target, the math will tell you what you should be saving to get there. That’s good information, because then you can decide what trade-offs may be necessary to make the math work. Knowing what to expect, as much as one can predict, we think is half the battle when seeking a confident retirement. So it’s important to know as early on as possible, if you aren’t saving enough to get there.
Second, we also help our clients consider where they are saving from a tax perspective [link to tax control article]. Depending on your tax plan and retirement time horizon, you may want to consider diversifying your retirement savings from a tax perspective too. Many default to saving into a pre-tax employer plan for a company match or to adjust their gross income down. But there may be other options for you that will help you control your tax liability when it comes time to create your own paycheck. It also may be necessary to have different accounts that are accessible to you at different ages.
Finally, review these calculations over time. Life is not a straight line, and savings and investments aren’t either. Greater than anticipated returns mean you could be saving less. Less than anticipated returns may mean you should try to save more. Bonuses and pay raises, mortgage pay-offs and empty nesting all make for great opportunities to increase savings. And when in doubt, always save more (of course).
Securities offered through LPL Financial, Member FINRA and SIPC. Investment advice offered through U.S. Financial Advisors, a registered investment advisor. U.S. Financial Advisors and Haas Financial Group are separate entities from LPL Financial.
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