The modern guide to retirement planning: start planning now
It is important to know how to plan for retirement. You already know that you want a secure and comfortable retirement. You just might not know how to get there. Retirement planning takes time, but the process can be made simple. You have to save up for years in order to retire comfortably. Fortunately, retirement planning can be broken into easy achievable steps. If you complete these steps over time, you will find yourself in a much better place for retirement.
It is rare for people to want to talk about retirement. No one wants to think about getting older and the things that come with it. No one wants to think about the things they will no longer be able to do. Retirement can be a difficult conversation. However, it is an important conversation to have. If you have kids or loved ones, then you need to plan for retirement. The last thing you want to do is make those loved ones financially responsible for you later in life. Your kids will have their own bills. They may want to have their own home or family. Most people cannot cover their own bills plus the expenses of their elderly parents. If you love your family, work on your retirement today. Working on your retirement plan now helps them later.
Follow the five steps below to plan out your retirement:
- Identify your retirement goals
- Think about your timeline
- Determine your risk comfort level
- Set up your investments
- Keep working on your estate
Identify your retirement goals
What level of financial security do you want when you retire? There are a few things to consider here when answering this question.
Reflect on how much you make now in a year. Determine if you feel like your current income is enough to cover your day-to-day expenses. How financially secure do you feel right now? From there, determine if you want to live off of more or less than that each year of retirement. Do not forget about inflation. With the natural inflation rate, you will need to save more than you think you do.
Remember to factor in other expenses like medication or doctor appointments. Keep in mind that you will no longer be constrained to a job every day. You will likely have about 40 more hours to yourself each week. How will you spend that time? Many retirees fill that time with a costly hobby, travel, or even shopping. Others fill that time by volunteering or working part-time. Depending on how you plan to spend that time can affect your monthly spending habits. Do you plan to work a part time job or have some form of income, other than social security, when you are retired? Determine how or if you anticipate on making money. Calculate about how much money you think this part-time job or hobby will bring in each year. Be realistic. You will not be looking at a 60K salary while working part-time for minimum wage.
Think about what other expenses you might experience while retired. If dementia or Alzheimer’s runs in your family, you will also want to consider the cost of care. You can look at at-home care or even the cost of care at a nursing home. There is no way of knowing if or when you will need care, but you might consider it in your equation.
Once you have determined these questions, it can help you find a rough estimate. Consider how much money you want to live off of each year. Think about how many years you think you will be retired. You might be retired for 15 – 30 years. If you are unsure of how long you will be retired for, take a look at Forbes’ Retirement table. Multiply the amount of money you want to live off of each year with the number of years you plan to be retired. The number you calculate will be your goal for retirement.
Think about your timeline
When do you plan on retiring, and how much time do you have until then? Determining how much time you have until retirement can help you identify how much time you have to save money. It can also help you determine what type of investments you should consider.
Most financial experts recommend working on your retirement savings even while you are in your twenties. If you are well past your twenties, do not fret, there is still time to save money. You just have to be stricter about working on your savings. Subtract your current age from your planned age of retirement. That is how many years you have to save money. You determined what your retirement goals are in the last step. Now you will divide your retirement goal by the number of years you have until retirement. It may seem overwhelming, but the good news is that you do not need to save that up on your own. A lot of retirement planning is based on investments and retirement accounts. This brings us to the next part of this step: determining which types of investments to consider.
If you have a long time until retirement, like 30 years, you might want the majority of your finances in higher-risk investments. These investments may go through high and low periods over time. The idea is that over a long time, there will be a steady increase. On average, these investments do better than less-risky investments. If you are closer to retirement, you might want to focus your portfolio on preserving your savings. You will want to consider safer returns, like government bonds. These returns will not grow as much, but they are less likely to have a sudden drop. The good news about being close to retirement is that you do not have to worry much about inflation. Younger individuals have more time for the inflation rate to change their plans. People closer to retirement do not worry about a big change to the cost of living.
Determine your risk comfort level
There are many different ways to save, but each of these strategies come with different levels of risk. When we say risk, we mean how much the account or investment is likely to change. If you are familiar with the stock market, you know that it can go up or down over time. If you looked at the stock market during the pandemic, you know that it was low at times. If you took out your money during the pandemic, that money might not have been worth as much as it would have been even six months before the pandemic. In the end of the day, the market still continues to increase at an average of about 10%. There might be months where it is better or worse. Over an extended period of time though, you will likely see your stock grow. That is just one investment. You might have multiple different investments.
You might have some investments in high-risk stocks. You might have some lower-risk investments like treasury bonds. You can work with a professional investor or money manager, or you can work on your own. You will need to understand the pros and cons of risk tolerance when creating a portfolio that matches your needs.
Part of that process includes looking at your retirement goals and knowing your necessities and luxuries. It would be nice to go on a cruise every year in retirement, but that is a luxury. Having a roof over your head is a necessity. Try to find portfolios where the low end of risk is just above your necessities line and the high end of risk is just above your luxury line.
When you do have investments, do not check on them every day. That sort of activity will only make you stressed. You might have one bad year, worry, and change up your portfolio when there is no need. Markets will go through cycles. Let your investment portfolio grow over time.
We have listed a few different ways to save money in the next step.
Set up your investments
Part of retirement planning actually includes saving money. We have discussed how much money you will need for retirement, and how long you have to save. Now we will talk about how to save up that amount. Below are several ways to grow your retirement savings.
Contribute to your employer’s 401K. If they have a match program where they will put an equal amount into your account, try to deposit the max amount. When you do not put in the max amount, you are just leaving money on the table. Imagine if someone said, “put money in this hat and I’ll match what you put in there” and then you only put in $5. If you had put in $100, you could walk away with $200. Instead, you are only walking away with $10. Companies that offer matches often have some max limit. Find out what your company’s match limit is. When you leave or change jobs that money goes with you. Open an IRA account and move the money over to it. This account is similar to a 401K, except, it is an account that you own separate from your employer. If you change jobs or leave, your 401K money can go into an IRA account without a tax penalty. You can set up these accounts on your own, or you can work with a financial advisor to get these set up for you.
When it comes to finding the finances to invest into these amounts, there are a number of ways to save the money. Check out our blog on budgeting to set up a household budget. Creating a budget can help you decrease the amount of spending that you do. You can also do an automatic withdrawal of money each month and move it to a savings account. It can help you save a consistent percentage of your income. Setting this up with your bank account can help you stay on track for your saving goals. Since it is automatic, you do not have to remember to withdraw the money yourself! Out of sight, out of mind. You will forget you have that money until you need it for retirement.
If you come across extra money, stash it away. Were you one of the Americans that did not need to use their full stimulus check? You could have saved part of it for retirement. If you receive a raise at work, or even a holiday bonus, that would be bonus money. Try to save at least half of it for retirement. Every little bit helps. Finally, if you are easily bored, delay your social security. Social security rules change, but right now, people that are holding their social security back from age 62-70 are increasing the amount they receive in the future. If you get bored easily and plan to stay active and working full time until 70, then you might want to consider this strategy.
Keep working on your estate
Life insurance, wills, accounts, and retirement-planning are all part of this step. It is important to make sure you set up a proper estate plan now. In the future, loved ones will grieve your death. Do not make things more difficult. You do not want to make them face financial hardships due to unproperly willed assets or even funeral costs. Setting up an estate plan can help make the process easier for everyone. It keeps things out of the expensive and tiring probate process. It also ensures that your wishes for your remains are carried out as you wanted.
Estate planning is one part of the process you want to do for your retirement. You do not know what the future brings. If you have loved ones, it is a good idea to protect them from the hardships of having to pay for a funeral single-handedly or having to fight over remaining assets. It also ensures that you are considered to be of “sound mind” when you outline your will.
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