Planning for Retirement is a Financial Goal To Grow Rich
Your financial security in retirement isn’t just going to happen. You need to plan for it and have a commitment. Planning for retirement is a multistep process that will evolve over time. In order to have a secure, fun, and comfortable retirement, you need to build a financial cushion to fund it all.
Planning for retirement begins with you thinking about your goals and how long you have so you can meet them. You then also need to think about the types of retirement accounts that can help you get there. Planning for retirement also means thinking about taxes.
What Is Retirement Planning?
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Retirement planning is figuring out how much money you need to save for retirement and then having a plan to get there. Retirement shouldn’t be about age but instead about a financial number. As you start planning for retirement, there are some questions that you will want to ask yourself. When do you want to retire? Which retirement accounts should you use? What about medical expenses or long-term care while in retirement?
Why Should I Plan for Retirement?
Your retirement plan is important because it gives you a plan for success. It can inspire you to finally take action. No matter how old you are, if you don’t have a retirement plan in place then now is the time to start one. Sit down with your spouse or meet with a financial advisor and start asking the hard questions. The sooner you meet with an advisor and start planning for retirement, the faster you will be able to make some progress.
Understanding Your Time Horizon
Your expected retirement age and your current age help you create the groundwork in order to determine an effective strategy. The longer the time is between your retirement and today, the higher risk you can have in your portfolio.
Taking Risks
For example, if you are young and have about 30 years until retirement then you should have more of your assets in riskier investments, such as stocks. While there is volatility in stocks, stocks usually perform better than other options, especially over long time periods. However, the key is those long-term periods and it should mean more than 10 years. You want to make sure that your returns can outpace inflation so you are able to maintain purchasing power during retirement. While inflation may not seem like much, over time it can have a big impact.
Keeping It Safe
The older you are, the more you need to focus your portfolio on income and the preservation of capital. This will mean that you need more in securities and bonds. While you won’t get as much of a return as you would in stocks, the income will be less volatile and will give you the income you can live on. You may also want to break up retirement plans into multiple components. A retirement plan with multiple components will integrate various timelines and your liquid needs to determine the best allocation strategy. It helps to rebalance your portfolio over time as your timeline changes.
Retirement Goals by Age
You can use your age to help guide your planning for retirement and have retirement goals by age. By the time you are 30, you should have at least half of your annual salary saved. This means if you are currently making $50,000 you should have $25,000 saved for retirement. By age 40, you should aim to have twice your annual salary. In another 10 years by age 50, you should have four times your salary. By age 67, you should have eight times your salary. This means if you have reached 67 and are earning $75,000 per year, your goal should be to have $600,000 saved.
This is just one method of retirement goals by age and the 80% rule is also popular. This means you should be saving as much as you would need to have the equivalent of 80% of your salary for about 20 years. This can be a lot of money, depending on if you factor inflation into the mix.
Determine Retirement Spending Needs
It’s important to have realistic expectations about your spending habits in your portfolio. This will help you define the size of your portfolio. Retirement may be more expensive than you think. A lot of people think that their retirement spending will be about 80% of what they are spending previously. This is usually unrealistic, especially if you are still paying off your mortgage or have some medical expenses.
Many retirees actually spend the first year splurging on travel or other goals on their bucket list. The ratio should be closer to 100%. The cost of living increases every year, especially when it comes to health care. It’s important to note that people are living longer and want to thrive in retirement. The longevity of your retirement portfolio will depend on your withdrawal rate.
This means having an accurate estimate of your expenses during this time is going to be so important and will affect the amount you are going to withdraw each year. If you are underestimating your expenses then you can outlive your portfolio. You may also need more money than you think if you want to fund your child’s education or purchase a home.
calculate the tax rate
Once you have calculated your spending requirements and time horizons then you need to calculate the after-tax real rate of return in order to see the feasibility of your portfolio in giving you the needed income. A required rate of return in excess of 10% before tax can be an unrealistic expectation, even for the long term. As you get older, the return threshold goes down. Depending on the type of retirement accounts you have, the investment returns are usually taxed.
You should be calculating the actual rate of return using the after-tax basis. However, it’s also important to determine your tax status as you start to begin to withdraw funds as you go through the retirement planning process. The good news is that you are also allowed to have more than one retirement plan so you don’t necessarily need to decide.
Assess Risk Tolerance
A balanced portfolio will take into account risk aversion and return objectives. This is an important step in the retirement planning process. Figure out how much risk you are willing to take to meet objectives. You will need to be comfortable with the risk that you are taking in your portfolio and know what is a luxury and a necessity.
You should talk about this seriously with your financial advisors and family members. You don’t want to micromanage and react to the daily market. Markets do go through long cycles of ups and downs and if you are investing money you don’t need for about 40 years then you can see your portfolio fall and rise with the cycles. When the market declines, that is the time to buy and not to sell. Don’t give in to the panic.
Stay on Top of Your Estate Planning
Estate planning is also another part of your retirement plan. Each aspect does require the expertise of different professionals, such as accountants and lawyers, so it’s important that you stay on top of it. Life insurance can also be an important part of planning for retirement and an estate plan. Having both life insurance coverage and a proper estate plan can mean your assets are distributed in a manner that you want and your loved ones don’t experience financial hardship after you are gone.
The outlined plan also means that there doesn’t need to be a lengthy and expensive probate process. Tax planning is an important part of the estate planning process. If you want to leave assets to a charity or family member then you should consider the tax implications of giving the benefits or passing them through the estate. Estate planning will change over your lifetime. In the beginning, it’s more about powers of attorney and wills. However, once you start a family then having a trust can be an important part of your financial plan. Later on, you need to determine how much of your money you want disbursed in terms of taxes and costs.
Ways to Save for Retirement
Saving for retirement is important. The first step is to start saving and then keep saving. If you haven’t started yet then you may need to start small and work to increase the amount you save each month. Remember that the sooner you start saving for retirement then the more time your money has to grow.
Contribute to Your Employer’s Retirement Savings Plan
One way you can save even more is to this. Your taxes will be lower and your company may kick in even more. It’s easy to save with automatic deductions. Over time, the tax deferrals and compound interest can make a huge difference in the amount you will accumulate. Of course, you do have to find out more about your plan.
How much do you need to contribute in order to get the full employer contribution?
How long do you need to stay on the plan in order to get the money?
If your employer has a pension plan, you should also take some time to learn about this. Ask about an individual benefit statement to see what your benefit is worth. Before you think about changing jobs, you should find out what happens to your pension benefit. You may want to see what benefits you get from your previous employer. If your employer doesn’t have a plan, you can ask your employer to start one. There are a number of different employer plans available and a simplified plan may be able to help both you and your employer.
Consider an Individual Retirement Account or IRA
This is something to consider if your employer doesn’t have a plan that you can use. You are able to put $6,000 each year into an IRA and you are able to contribute even more if you are over the age of 50. There are different tax advantages to an IRA depending on which type you choose. When you go to open an IRA, you will have two options.
You can choose a Roth IRA or a traditional IRA. The tax treatment of your withdrawals and contributions will depend on which option you choose. The after-tax value of your withdrawal will also depend on the type of IRA you use. Using an IRA can be an easy way to save and you can set it up so that the amount you want to save is automatically deducted for your savings or checking account.
Not only is the number you save important but it’s also how you save. The type of investments and inflation will play a big role in how much you have ended up saving at retirement. It helps to know how your pension plan or savings are invested. Be sure to ask questions. You also want to consider diversifying by putting savings in different investments. This way, you can reduce your risk if you need to but still earn a return.
When you are working hard for your retirement savings, the key is then to not touch it. If you withdraw from your retirement savings before you are ready then you may have to pay withdrawal penalties or lose the tax benefits. If you are changing jobs then leave your savings invested in your current retirement plan or roll it over to your new employer’s plan or an individual IRA. We have savings account suggestions for you. If you're ready to get offers, start here:
Something you should learn about when it comes to saving for retirement is Social Security. Social Security retirement benefits can replace about 40% of the median wage earner's income after you retire. Estimate your benefits by looking at the Social Security Administration’s website.
Be Well Informed
When it comes to saving and planning for retirement, you need to ask questions. Whether it’s talking to your employer, bank, or financial advisor, ask questions and make sure you understand the answers. The more you know about planning for retirement, the better off you will be.
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Why Work with a Financial Advisor for Retirement?
The sooner you start planning for retirement, the easier it will be. Since saving for retirement may not be a huge priority when it comes to repaying debt and your daily expenses, it may make sense to work with a retirement advisor or financial advisor.
An advisor can help you with a number of different tasks depending on his or her qualifications. He or she can help you come up with your retirement savings goals and determine what steps you need to take in order to achieve these goals. If you have retirement savings in place, an advisor can pinpoint any potential gaps in your plan. You can also learn how to maximize tax advantage accounts, such as an IRA or 401k.
Benefits
One of the main pros is that an advisor has specialized knowledge that you don’t have. They can help you look at your plan and be objective to figure out what is working and what is not.
Your advisor can also help you stay level headed when the market is experiencing volatility so you aren’t buying or selling at the wrong time in order to avoid anxiety or fear. An advisor will also stay up to date on policy changes or tax laws that can affect your retirement plans. This is important if you want to avoid costly mistakes that could affect your retirement. For example, if you want to make an early IRA withdrawal in order to buy your first home or help pay for your child’s education, you should know what penalties you are taking. You should also know how withdrawing this money early could impact your long-term plan. These are the questions that retirement advisors can answer.
The only downside of working with an advisor is that the services aren’t free and you will have to pay to work with one. However, you can find advisors that do have reasonable fees and will still fit your needs.
How to Choose One?
If you feel ready to work with an advisor, there are some things to keep in mind. You should look at their professional certifications and background, the services they offer, the fee structure, and the overall investment style and strategy. Consider the clients they typically work with. You will have different needs in your 20s than someone who is in their 50s so you want to make sure your advisor is the best fit for your needs. Ideally, it’s best if your advisor has experience working with clients that have similar aspirations and backgrounds as your own.
To Sum Up,
Planning for retirement is an important part of your financial goals. While it may seem daunting at first, you need to start somewhere. Think about your age and your retirement goals to get some numbers to strive for.
There are different ways to save for retirement depending on what your employer offers. You will likely have a lot of questions about the process and working with a financial advisor can be helpful as you navigate the years ahead in order to have the best retirement possible.