Retirement Basics

Experts suggest that every person needs between 70% and 85% of their pre-retirement income to maintain their standard of living after they stop working. That said, retirement is highly personal, so you should tailor your goals to your needs and lifestyle. Your needs could be higher if you plan on doing a lot of traveling in retirement or if you foresee having significant medical expenses. They could be less if you plan on downsizing or living more modestly than you are now.

There are three things you need to do to get started:

1. Get a ballpark idea of your lifespan so you know how many years of financial support you will need once you retire. According to the CDC, the average American male can expect to live for 74.8 years, while the average American female can expect to live for 80.2. years. Therefore, if you plan to retire at 65, you need to plan for at least 10 to 15 years of spending in retirement – and your planning should ensure your spouse has an income for their retirement should you pass first. Calculating life expectancy is not an exact science. It not only varies by gender, but also by location, ethnicity, health conditions, and more. It is better to plan for a longer life than a shorter one.
2. Calculate your financial needs. Consider your current age, income, and retirement savings; your desired retirement age and how many years of income you will need; and whether you want to include Social Security benefits in your planning. Note that your calculation is just an estimate.
3. Start saving. Time is your best friend when it comes to growing your retirement savings because the longer your money has to grow, the longer that compounding interest will have to work in your favor. Any money that you can put aside today will help you in the future.

When it comes to saving for retirement, you need to do more than put money into a savings account. There are specific types of accounts that are earmarked for retirement funds, and they behave differently than your everyday checking or savings account.

The two most common types of retirement accounts are 401(k)s and IRAs. (There are other types of retirement plans that you can learn about here.)

A 401(k) is an employer-sponsored retirement account that allows employees to contribute a portion of their income to their retirement funds before payroll taxes are taken out. This effectively lowers the employee’s taxable income at the time of contribution. Many employers “match” a percentage of what the employee contributes to their 401(k), and some may pay the fees associated with the account – though many leave that to the participating employees. If your company has a 4% match, for instance, everything you contribute up to 4% of your compensation will also be contributed – or matched – by your employer dollar for dollar. This money is free money and should never be left on the table; if nothing else, contribute to the plan up to the employer match even if you can’t make the maximum contribution.

Not all companies offer sponsored retirement plans. If this is the case for you, you may want to consider opening an Individual Retirement Account, or IRA. These accounts are funded by your personal contributions and you are liable for all associated fees. If you open a traditional IRA, you contribute pre-tax dollars which decreases your taxable income at the time of contribution, but you will have to pay taxes when you receive distributions in retirement. A Roth IRA allows you to contribute after-tax dollars and therefore does not affect your taxable income when you contribute but, because you already paid taxes on the contribution, allows you to take future retirement distributions from your contributions tax-free. You may be required to pay taxes on investment income or penalties if you withdraw funds too early. All IRAs have a contribution limit.

Considerations for Servicemember Retirement Pay

The Department of Defense, the US Coast Guard, USPHS, and NOAA offer the Blended Retirement System (BRS) to servicemembers with an initial date of entry into service on or after January 1, 2018. In addition to providing monthly payments in retirement to those who serve 20 years or more, it also provides access to the Thrift Savings Plan to all enrollees (and TSP accounts can stay open after a servicemember leaves the military). BRS enrollees begin earning Automatic Contributions (1%) after 60 days of service. Then they begin receiving matching contributions from their branch after completing two years of service. Matching contributions range from 1–4% depending on the servicemember’s personal contribution. As mentioned above, it’s important to contribute the maximum allowable percentage to get the highest match and avoid leaving free money on the table. Legacy military retirement plans include REDUX and High-36 (sometimes referred to as “High 3”).

Servicemembers who are medically unfit to continue service and who have a DOD disability rating of at least 30% are also eligible for disability retirement pay. This pay is based on the plan the servicemember qualifies for or elected and their overall DOD disability rating. In certain circumstances, these retirees may also be eligible for VA disability payments. However, there are some limitations to disability retirement pay that are regulated by law.

It’s important to factor military retirement pay into your overall retirement plan – it may decrease your reliance on other savings methods.

Here are a few other helpful tips:

• Set up automatic contributions from your paycheck to your retirement account(s). If you have a 401(k), you can do this by talking to your company’s Human Resources or payroll department. They will be able to help you access your account and have money automatically deducted from your paychecks. If you do not have an employer-sponsored account, set up automatic transfers from your checking account to a retirement account.
  • If you joined the military after January 1, 2018, you were automatically enrolled in the Thrift Savings Plan. If you are active duty military and not yet enrolled in TSP, or want to change your contribution amount, talk to a representative at the finance office on base, visit MyPay or DirectAccess, or visit the TSP website.
• If you are young, you can usually afford to be more aggressive with your risk-taking when it comes to your retirement accounts and investments. Employer-sponsored retirement plans often allow you to pick “target-date funds,” which get more conservative as you get older and closer to retirement. If you have an IRA, you may have to adjust your investments manually. It’s often a good idea to talk with a financial adviser and your spouse about your retirement goals when making these selections.
• If you are over 50 years old and have designated retirement accounts, you can take advantage of “catch-up contributions.” This means that you can contribute extra amounts to your 401(k), TSP, or to an IRA than typically allowable. The limits on these contributions can change on a yearly basis, so talk with a financial adviser to determine how much you can contribute.
• If you get a bonus or a raise, pay yourself before you spend your money on fun items or experiences. If you have not maxed out contributions to your retirement accounts for the year, use additional funds to do so. If you have already maxed out your contributions for the year, consider diversifying your investments by purchasing an annuity, a type of conservative, tax-deferred retirement investment that will give you a guaranteed income stream for a set period of time or the remainder of your life.

Life events happen and you will need to modify your plan as you grow older. Talk to your employer or the company that manages your retirement account(s) about your current investment options. Consider annuities if you want more diversity in your retirement planning. Most importantly, start saving now so that you can reap the rewards in the future. Your retirement is in your hands.