Retirement Planning Strategies 101
Budget planning and operating within a budget during your working years might seem to be much easier and more attainable than forecasting what your income and spending needs will be during retirement. Afterall, balancing the household budget while knowing what your take-home pay is and what your spending habits are involves much less calculating and guessing and is more tangible.
When you peer into the future – maybe as far away as a few decades from now – how can you possibly guess or predict what your life will be like, let alone how much money you will need to be able to afford cost-of-living expenses? What about paying for fun activities such as travel and leisure and other adventures?
Despite the ambiguity surrounding the notion of retirement planning, retirement is the number one financial goal of the vast majority of Americans. However, this goal is typically predicated more on aspiration than on actual actions.
Simply conjuring up images of retirement without doing some diligent evaluating as to what your wants and needs will be decades from now can have serious consequences. For example, approximately half of all people who retire at age 65 in this country will not be able to maintain their pre-retirement lifestyle, according to the Center for Retirement Research at Boston College.
Planning for retirement begins with setting goals for your golden years. What do you think will be your priorities for your post-work lifestyle, and what types of activities do you want to enjoy during your retirement years?
Here are some basic questions to answer so you can formulate how much money you will need in retirement:
- At what age do you plan to retire?
- Where do you plan to live during retirement?
- Do you intend to do extensive traveling during retirement?
- Do you anticipate major medical needs later on based on your current health profile?
- Are you saving money in retirement accounts such as a 401(k) or an IRA?
- Will your hobbies and interests you intend to pursue in retirement be expensive, and how much would you estimate they will cost?
Steps to Take to Successfully Plan for Retirement
There are measures you can take to make retirement planning seem less daunting and help you accurately gauge what your post-work desires and needs will be.
Here are some practical tips for planning your retirement:
Determine Your Retirement Age
Knowing at what age you intend to retire will influence your financial planning when it comes to retirement. The more time you have between now and retirement, the more risk you can take with your portfolio. For example, if you have 25 to 30 years before you will likely retire, you should consider having most of your assets in riskier investments. Riskier investments could involve stocks, for example.
One important objective you should have during financial preparation for your later years is securing returns that outpace inflation so you can maintain your purchasing power during your retirement. You should think of inflation as something that will erode the value of your money over many years.
As a rule of thumb, the older you are the more your portfolio should be focused on income and preservation of capital. This approach translates into a higher allocation in securities, such as bonds. Securities like bonds might not yield as high a return as stocks, but they will be more steady and less volatile, while giving you income you can live on down the line.
Identify Your Spending Needs for Retirement
The key here is to have realistic expectations for retirement spending habits. This critical bit of information will inform the process of building your retirement nest egg. Too many times people assume they will only require 70 percent to 80 percent of what they spend during their working years during retirement. This strategy omits relevant factors such as a mortgage still needing to be paid off, unforeseen medical expenses, and inflation.
“In order for retirees to have enough savings for retirement, I believe that the ratio should be closer to 100 percent,” says David G. Niggel, CFP, ChFC, AIF, founder, president and CEO of Key Wealth Partners, LLC, in Litiz, PA. “The cost of living is increasing every year – especially health care expenses. People are living longer and want to thrive in retirement. Retirees need more income for a longer time, so they will need to save and invest accordingly.”
Keep in mind, you might need more money in your later years if you want to buy a home or pay for your children’s education. You have to factor in these outlays into your retirement plan. It helps also if you update your retirement plan annually to ensure you are staying on track with your savings.
Lower Your Debt
When you reduce your debt, you have more funds freed up to allocate toward your retirement. It makes the process of building your savings for retirement much easier and more attainable.
Decreasing your debt can begin with delaying purchasing a car – or avoiding car payments altogether – paying off college loans and other loans, as well as responsibly managing your credit card debt.
Also, in the present, cut down on expenses as much as possible. Make sure your current hobbies and interests don’t call for borrowing money in excess so you don’t allow debt to grow to unmanageable levels.
Save At Minimum 15 Percent Every Year
The conventional thinking used to be that saving 10 percent of your household income every year was adequate. However, financial planning experts have since adjusted the figure to
Taking into account how much longer we are living now – often 20 to 25 years or more after beginning retirement – along with the demise of the pension, this adaption has cast a new light onto what level of savings is sufficient for retirement.
The 15-percent rule is based on the following assumptions: you begin saving for retirement at age 30, and you plan to retire in your mid-60s. For example, if you don’t start saving for retirement until you are 45, you should probably set aside 25 to 30 percent of household income.
When calculating how much of your household income to save for retirement, consider these cost-of-living factors:
- Health-care costs (Fidelity estimates the average couple will require $295,000 in today’s dollars for medical expenses in retirement, excluding long-term care.)
- Entertainment, including movies, restaurants, plays
- Housing costs, include rent or a mortgage, heating, water and maintenance
- Travel, including flights, hotels, gas if driving
- Day-to-day living, such as food, clothing, transportation
- Possible life insurance
Maximize Retirement Accounts
You not only have as retirement savings options your own personal savings, but employer and U.S. government retirement savings accounts too. Uncle Sam’s retirement accounts offer unique tax advantages.
An IRA account can be opened by anyone with earned income.
Then there are employer accounts including 401(k)s, 403(b)s, and the Thrift Savings Plan (TSP). Some employers add more to the pot by matching your contributions to your account.
These same accounts are also available to people who are self-employed.
Tax Advantages to These Accounts
Traditional IRA/401(k)/403(b)/TSP: Contributions to these accounts could lower your taxable income, which means you receive a lower tax bill in the year of the contribution. What’s more, you will not have to pay taxes on the interest, dividends, or capital gains generated by your investments in the account each year. However, withdrawals from these accounts are taxed as regular income.
Roth IRA/401(k)/403(b)/TSP: Although you will not receive tax benefits on contributions, investment returns and withdrawals are tax-free as long as you adhere to the rules.
The tax breaks associated with these accounts can increase your retirement savings by tens of thousands of dollars in comparison to what a traditional bank or brokerage account would yield.
Greater Responsibility Falls on You for Retirement Planning
As fewer of us can rely on employer-based defined-benefit pensions, especially in the private sector, more of the burden for preparing for retirement falls on you, the individual. In fact, changing to defined-contribution plans like 401(k)s puts the responsibility on you entirely, and not your employer.
This shift is why it is advisable to create a comprehensive retirement plan including a flexible portfolio that is able to be updated annually to reflect changing market conditions and retirement objectives.
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