Retirement planning refers to your strategies to maintain your finances and a good life after leaving the workforce. For young individuals, retirement seems far even to cross their minds. However, many people leaving the workforce wake up to retirement with little or no savings. Therefore, the trick is to start planning and saving as early as possible.
However, retirement planning isn’t a walk in the park, it requires you to answer overwhelming questions like when are you going to retire? How long do you think you’ll live? How will the inflation rate be in the future? What lifestyle do you wish for after retirement?
Many people wonder why you should plan for retirement. However, retirement planning is necessary as it helps you relieve the burden off your family, helps support your desired lifestyle, and has financial freedom. If you have no idea about retirement planning, below is a Retirement Guide to help you out.
1. Determine When You Want to Retire
One step toward planning for retirement is identifying when you need to retire. Determining this helps you know how many years you have to save and effectively plan your retirement. If you’d like to retire at 65, as many people do, you only subtract your age from this to get the years you have left. Narrowing down these years helps you determine how much money you need to save each year to reach your retirement goal. It also gives you ample time to search for a retirement village that will incorporate the lifestyle you want.
However, retirement doesn’t have to be determined by your age and savings only, other targets signal you’re ready for retirement. For instance, if you have eliminated all your debts like mortgage, car loan, student loan, and other outstanding loans. Having no debts allows you to use your savings and retirement income on future expenses only. Additionally, suppose you have health insurance and a plan to deal with emergencies. In that case, you might as well be ready to retire because what many people fear in retirement is the unknown.
2. Estimate Your Expenses
After determining when you should retire, the next step is to create a budget to approximate annual expenses when you retire. This makes your retirement planning easier as you’ll know how much savings you’ll need to maintain your lifestyle. In fact, to determine how much money you’ll need to retire, you must first approximate your retirement expenses. Many retirees make the mistake of underestimating their retirement expenses, which makes them overspend their savings only to have financial challenges later.
The best way to start estimating your retirement benefits is by using your current salary as your base, then adding and subtracting expense changes in retirement. For instance, your employer will stop paying for your health insurance after retirement, and you’ll have to incur that cost. You’ll also need to add things such as travel and healthcare expenses. Finally, you’ll need to add money for unexpected emergencies. However, some expenses will decrease upon retirement. For instance, transportation expenses to work will decrease. Also, you won't incur monthly installments if you’ve fully paid your mortgage before retirement.
3. Invest in Different Retirement Options
Investing your money for retirement is essential as it guarantees financial security after you leave the workforce. Investing your money in a retirement savings account ensures your money doesn’t lose its purchasing power through inflation.
Additionally, when you invest in accounts you benefit from the power of compounding, which means gains grow on other gains. But what investment options should you use for retirement savings? The best plans include 401(k) plans, traditional IRA, One-participant k, and traditional pensions.
401(k) plan is a plan that allows employees to save with pre-tax wages, which means the savings aren’t considered taxable income. The savings grow tax-free until they’re withdrawn at retirement. Traditional IRAs allow employees to save for retirement with significant tax breaks. One-participant k, also known as Solo 401(k), is a savings plan for retirement that’s meant for business owners without employees. On the other hand, traditional pensions are one of the easiest plans to invest in as the employer pays the pensions. These pensions offer monthly benefits to employees upon retirement.
4. Plan Where You’ll Live
The retirement village you choose will have a significant impact on your expenses. For instance, if you sell your big house, which is located in an expensive city, and buy a smaller home in a low-tax town, your expenses will decrease significantly.
Retirement planning is essential as it allows you to cater to yourself, thus avoiding the stress and depression that older people face after retirement. Therefore, even if you started saving for retirement late or are yet to begin, know you’re not alone, follow the above tips to effectively plan for your retirement.