According to experts, people now live longer and can remain active and healthy well into their golden years. Unfortunately, most people still need to prepare for retirement, particularly regarding their finances fully.
You work hard to achieve your current lifestyle. As such, you want to ensure all your hard work pays off, especially during retirement.
Retirement planning can help you become financially comfortable after leaving your job and truly enjoy your retired life.
That said, how do you even start? In this article, you’ll learn the basics and tips for planning your retirement, from determining retirement age to choosing a retirement account like 401(k) and 403(b) to streamlining your current funds.
- When Will You Retire?
First, you need to know how much time you must prepare. According to 2023 statistics, the average life expectancy in the world is 73.16. You can use this number as a reference in preparing for retirement and calculating how much time you have between your preferred and current retirement age.
For instance, if you plan to retire at 65, you must have a retirement fund or pension for living expenses for 5-10 years. So, if you’re 25 years old and want to retire at 65, you have 40 years to prepare and plan your retirement.
- Calculate Your Retirement Income And Expenses
Once you know how much time you have left to save for your retirement, the next thing to do is to calculate how much funds you’ll need to retire comfortably.
Start by looking at the predictable income from available sources, including Social Security and employer pensions. Then, check your investment and savings account, wages, and other income earned before retirement.
Then, calculate your expected expenses. Please note that some costs, like healthcare, tend to be higher as you reach your senior years. That said, other expenses like commuting and clothing may decline.
Once you’ve calculated both, you know how much more you’ll need for retirement. To ensure you have healthy finances during retirement, you should have a balanced retirement income-to-expense ratio. You can also follow expert recommendations like the 4% rule, suggesting that you should spend no more than 4% of your entire retirement savings every year.
For instance, if you have USD$1 million in retirement assets, you can afford to spend about USD$40,000 annually when you retire. Is that enough to support the retired life you want?
- Choose A Retirement Account
Once you have figured out how much to save, you must consider where to put your savings. It’s not a one-size-fits-all solution, and the best retirement plan for you will differ from others. The best plans should provide tax advantages and additional savings incentives.
Most people start with a 401(k), but you can also take advantage of IRAs, 403(b), and cash-value life insurance plans. Consider increasing your contributions to the maximum allowed in your retirement accounts, regardless of your choice.
Bonus tip: As you near your retirement, consider consolidating these accounts to help simplify your investment management and get a clearer picture of your overall retirement assets. Also, remember to review any accounts you may still have with your former employers and learn about distribution and consolidation options when changing jobs.
- Stay On Top Of Your Current Finances
Managing your current finances may seem challenging. However, it will truly benefit you to do it now than when you retire.
First, you should do your best and settle your outstanding balances, which can help save you trouble during retirement. Consider paying off high-interest rate balances such as credit cards, auto, and personal loans first. These debts only eat through your savings if you leave them alone.
Then, pay down your mortgage so you don’t have to use your retirement fund to pay for your home. Also, avoid borrowing money, especially from your retirement accounts, to pay another debt. You’ll only owe taxes on the funds and may incur penalties.
As you settle your debt, start saving more. You can do it by cutting your expenses, working part-time jobs to earn extra, or both. By keeping more today, you’ll be better prepared for the future.
- Diversify Your Portfolio
In addition to traditional retirement accounts, you also want to diversify your retirement portfolio. Instead of leaving your savings in traditional bank accounts, consider investing them in stocks, mutual funds, bonds, and more.
Determining the right mix of investments will depend on how long you have until retirement and your risk appetite. By creating a diversified portfolio, you can achieve better financial growth and freedom in your golden years.
Retirement planning has never been more important than today. Transitioning from a busy work life to a retired life of comfort and leisure takes careful planning and decision-making. As such, you want to start as early as possible to prepare yourself thoroughly.
While there are other things you need to consider when planning your retirement, this article provides the basic and most important things to consider when starting the whole process.