Many people don’t realize that the purchase of retirement income will be the largest purchase most of us will make in our lifetimes. It’s typically two to four times larger than the expense of purchasing a home. This is where the retirement services industry has failed to properly educate most Americans, so the general understanding of how much is really needed in retirement remains an unknown for a large percentage of retirement plan participants.
Here are four things you can do now regarding your 401(k) to improve your future financial circumstances;
1. Know your ultimate goal for retirement How much money will you need to replace 70 to 90% of current income? This is the main question to ask now. But many 401(k) service providers today only talk about the asset (the money in the account) and don’t really educate participants on the liability — the amount you’ll need.
401(k) participants should focus on attaining the amount needed for retirement and put together a program to reach that goal with the least amount of risk.
Remember to also consider potential health care costs, everyday living expenses and retirement lifestyle expenses when you determine your goal. And keep in mind that in retirement, you most likely will no longer be paying Social Security tax (6.2% of gross salary), Medicare tax (1.45% of gross salary) or a 401(k) deferral (often 5 to 10% of gross salary).
2. Save as much as possible, once your goal is defined The retirement industry focuses a lot on the best 401(k) funds to be in and the return for the underlying investments. This is important and helps with attaining a goal. But by far, the most important aspect of having an ample 401(k) is saving as much as possible while keeping risks (and the goal) in mind. The savings will have the biggest impact on meeting the retirement objective.
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