In some ways, retirement planning has stayed the same for decades, but each new year brings its own set of unique challenges with it. Rising life expectancies, lower bond yields, and the global pandemic have changed the way some people need to approach retirement. These five tips will help you plan for your retirement.
1. Create Your Retirement Goals
One of the most important parts of retirement planning is determining how much money you will need to save. To begin this process, spend some time thinking about what you want your retirement to be like. Do you want to travel the world? Would you like to take some college courses you didn’t have time for when you were working? Or, would you prefer to live a simple life that doesn’t require as much money to support? Write down your goals on a piece of paper, your smartphone, or your computer.
2. Figure Out How Much Money You Need To Reach Your Retirement Goals
Once you have a set of goals, determine how much money you need to reach them. You can get an idea of how much things will cost in the future by looking up prices today and factoring in average annual inflation of about 3%. In addition to the cost of specific goals, such as taking a trip to Europe, you need to figure out the costs for daily living, such as food, housing, and health care. Finally, add up any income you expect to receive, such as social security payments, pensions, or rental income. If your expenses will exceed your income, the difference is the amount you need to have saved.
3. Start Saving As Early As Possible
It’s OK to focus on your immediate needs before retirement, but the earlier you can start saving, even if it is only a small amount, the better. By the time you reach your late 30s to early 40s, you need to be saving for your retirement in earnest. Create a budget that accounts for your current income and expenses, so that you have an idea of how much you can afford to save. Set up automatic transfers from your checking account to your retirement account, so that you don’t have to remember to move the money yourself. To avoid having to dip into your retirement funds, put three to six months of salary into a separate emergency account. Create a plan to pay off your debt by age 65.
4. Invest Your Money
To reach your savings goals you need to earn money on the money you are saving by investing it. Investing allows you to grow your money by taking advantage of compounding, which is the term for generating new gains by reinvesting current gains. There are several types of accounts you can choose from for your retirement funds.
A high-yield savings account is practically risk-free because the funds are federally insured and the value of your investment will not decrease; however, with even the highest-yielding accounts paying about 1% interest, you won’t make much money this way.
A traditional individual retirement account is a tax-advantaged investment vehicle intended specifically for retirement savings. Contributions to IRAs are usually tax-deductible. Additionally, any income your IRA generates will not be taxed until you withdraw the money from your account. This means you earn interest on your pre-tax income and you will probably pay less tax when you draw it out because you will be earning less income. However, there is usually a penalty for withdrawing money before the age of 59 1/2 and there is a limit on how much you can invest per year.
Traditional 401(k) plans are accounts offered by employers to employees. Contributions to 401(k) plans are pre-tax and some employers offer a company match. There are contribution limits, but they are much higher than for IRAs. However, you will still face a penalty for early withdrawal.
Simplified Employee Pension plans are options for self-employed people. It works similarly to a traditional IRA, but the contribution limits are different.
5. Consider the Stock Market
Investing in the stock market provides the greatest chance for growth for many individuals. However, it also comes with more risks than most other saving strategies, because while stock prices generally increase, sometimes they decrease. If retirement is still a long way off, most investors can avoid large losses by holding stocks until they go back up. However, people who are close to retirement may not be able to wait for the market to improve, which is why many retirement planners, such as Goldstone Financial Group, encourage people who are closer to retirement to focus on less volatile investments.
Whether you are a young person trying to get a head start on retirement savings or you need to do some catching up, these five tips can help you with your retirement planning. If you need additional guidance, consider consulting with a retirement planning professional.
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