The typical length of retirement 30 years ago was less than half the number of years it is today. It’s common for people to live into their 80s and 90s, which requires much larger savings and more years in retirement than before.
First, if you haven't already done so, use a retirement savings calculator to define your wealth number. Then read on to discover how you can achieve that number.
Whether you are an employee or business owner, crafting and executing a wealth plan or wealth strategy that incorporates both savings and spending is a must. Selecting the right retirement accounts and amounts can enable you to spend your golden years with peace of mind and freedom.
Simple steps to retirement if you are an employee
Whatever your company is offering for retirement savings accounts, take full advantage of them now. Most companies, large and small, offer some type of 401k or retirement vehicle for their staff. The typical pension benefits of the 50s, 60s, and 70s are long gone in most companies. That doesn’t mean you can ignore what your company does offer. If your company provides a matching feature in the 401k based on what you contribute, you must fund your 401k to that specific level or beyond.When your employer is providing some type of a 401k match, you are turning down a 100-percent return on your money if you fail to take advantage. This 100-percent return is above whatever investment gain you generate. Where else are you going to generate a guaranteed 100-percent return on your investment with zero risk?
Review your Social Security benefit statement annually
The Social Security you earn through your contributions needs to be monitored. You don’t have investment choices to make, but you do need to make sure you are receiving the Social Security income credit you paid in. Social Security is designed to replace about 40 percent of your income in retirement. You will need to save for the remainder in other accounts that you set up and control. The vast majority of people don’t plan or check on what could be 40 percent of their retirement income.Review your statement for income projections and qualification credits. You will need a minimum of 40 credits to be eligible for Social Security benefits. Your Social Security payments will be based on 35 years of earnings. The lower years of earnings, if you work more than 35 years, will start to drop off in the Social Security calculations. Those years when you were 16 years old working at McDonald’s will be replaced by your higher earning years in your late 50s and early 60s, which will dramatically increase your monthly benefit.
Review your benefit amounts for early retirement at 62, full retirement at 67, and delayed benefits at 70 years of age. You will receive an 8 percent increased benefit per year from full retirement age until 70 years of age. This is a large bonus if you can wait until 70 to start receiving benefits. There is no point in waiting longer than 70 to take your benefits. Your benefits will not increase past age 70 even if you are currently working at that age.
A married couple, whether both of them work or only one of them works, can each receive Social Security benefits. The stay-at-home spouse will receive a Social Security benefit that's half of the working spouse’s benefit. Few people know this fact and haven’t factored it into their wealth and retirement plans.
It’s important to save a portion of your Social Security benefits when you are both receiving benefits. There will be a time in the future when one of you passes away before the other and your benefits will be reduced. It’s not that Social Security will reduce your monthly check, but you will only receive one check, rather than two, losing the lower of the two monthly benefit checks through death. To lessen that financial loss, save 10 to 15 percent of your gross Social Security checks each month. This will help the surviving spouse not have to deal with both grief and financial hardship at the same time.
Set aside a percentage of your raises
As you become more valuable to the marketplace and your company, you will likely see an increase in pay. You could be recruited by a competitor for more income. Don’t spend all of your increased income and raises on consumption. We all certainly deserve some of the reward of being more valuable to the marketplace. The key is to put some of that increase aside to create wealth.If you can discipline yourself to put 20 to 30 percent of that increased earnings into savings and investments, you will quickly change your net worth through sacrifices that are unfelt by your current budget. If employees did that one thing over a 30-plus year working life, that one thing would dramatically change their retirement years down the road. It’s a painless way to increase your wealth quickly, and you can do it through increasing your contribution to the company 401k. Most employees do not max out their company 401k benefit at $18,500 per year. I would put any raises in a 401k plan to prevent myself from spending them. You can also save outside of the 401k in after-tax options like a Roth IRA or buying an investment property.
Invest in discounted company stock (but be careful)
There are companies that offer employees discounted company stock as a benefit. That stock investment can be inside or outside the company retirement plan. As an employee benefit, it can provide you with a way to buy a good asset at a lower price. Where trouble can come knocking at your door is putting too many eggs in one basket. If a high concentration of your retirement funds is invested in the company stock and the company has a rough patch financially, you could be laid off and your stock could be devalued as well.Most financial experts suggest that 10 percent is the maximum of your total assets that should be invested in your company stock. That seems a little low, especially if you are working for a company that is currently flying high. If you worked for Google, Amazon, Netflix, or Facebook over the last ten years and had only 10 percent of your retirement funds or after-tax money invested in those stocks, you would have missed out on a fortune.
Because you are participating in employee stock, which I would encourage if the discount is 10 percent or more, it’s incumbent on you to keep your ear to the ground at the office. You should know for your ownership and your career if the company is struggling. You should also read all the company communication to stock owners. Compare what you know on the inside to public statements and public comments. Is the communication inside the same as the communication outside? If it’s incongruent, it’s time to cut back your exposure to protect you and your family from the downside risk.
Simple steps as a business owner or entrepreneur
There are really countless options and strategies as a business owner to guarantee your retirement success. There are numerous retirement account options that you control the decisions on as an owner.As a business owner, the foundation is a good flow chart of your wealth plan with accounts and amounts clearly identified. Your wealth plan flow chart moves you from hope, theory, or desire, to execution. I have included a few flow charts in this book that I have used personally and taught to countless small-business owners who are now wealthy. You can see them in the following figures. The differences between the models has to do with where you are going to pay taxes and fund retirement savings. Are you going do it at the corporate level or at the personal level? In some instances, your model might encompass doing that at both levels, and that's when wealth can really be exploded.
Wealth Plan #1.
Wealth Plan #2.As a business owner, it’s easy to feel you are doing well because you see the gross revenue of the company. The employees only see their net check. A company owner can easily overspend when gross revenues are climbing. In reviewing these charts, you might feel there are too many accounts to manage. Wealth Plan #2 has at least four accounts at the personal level:
- Tax savings
- Personal savings
- College savings
- Retirement savings
The “secret sauce” for small-business owners
As a small-business owner, I have had every type of retirement account known to man. I have had 401ks, Sep IRAs, Keough, Money Purchase Pension Plans, Defined Benefit Plans, and Roth IRAs. There is not one that is the best over all the others. You and your accountant need to figure out — based on your age, income goals, and size of company — what options are best for you. All of the ones I mentioned have pluses and minuses, so a true professional is needed.But the real “secret sauce” is beyond just the accounts you use. It isn’t the type of account; it isn’t a type of investment class (stocks, bonds, commodities, or real estate). The secret sauce for a business owner, especially a small-business owner, is setting up your retirement accounts to be self-directed.
A self-directed retirement account allows more latitude to decide what you invest in. It’s different than when you have a standard, boilerplate plan that feeds funds to Wells Fargo, Morgan Stanley, Edward Jones, or any of the large financial advisor institutions. They generally don’t allow you to self-direct your assets into real estate, businesses, hard money lending, and so on.