Retirement planning is a process that unfolds gradually. It requires you to create a solid financial base that will fund a comfortable, yet fun retirement. To make the fun part possible, attention must be given to the serious part: planning the route to get there.
Successful retirement planning begins with establishing your retirement objectives and the timeframe you have to achieve them. You must also explore the different retirement accounts that can help you accumulate the money to secure your future. As you save this money, it needs to be invested to grow over time.
Taxes are the final part of the equation. If you've enjoyed tax deductions over the years from the money distributed into these retirement accounts, anticipate a hefty tax bill when you begin to retrieve those savings. However, strategies exist that can help mitigate the retirement tax impact while you're accruing funds for the future, and this process continues even after you eventually quit working.
Beyond these, there are five simple, age-independent steps that everyone should take to solidify their retirement plan.
Before diving into the details of your retirement, you must have a clear picture of how much money you'd need to save. This number will hugely depend on multiple variables like your annual income and your age of retirement.
While retirement experts have thrown around different saving estimates, you must calculate the ideal retirement savings according to your individual circumstances. Experts' rules of thumb recommend different figures: some suggest saving $1 million or 12 years' worth of pre-retirement income. Others advocate the 4% rule, which implies that retirees should spend no more than 4% of their retirement savings annually to secure a comfortable retirement.
On your journey to retirement, contemplate the factors that come into play concerning your retirement. This includes family plans, lifestyle changes, and the financial implications of choices made during retirement. If travel is on your bucket list, know that it can substantially shrink your retirement savings. Alternatively, relocating to a country with a lower cost of living might allow you to extend your savings while enjoying a high standard of living.
Also, consider different types of tax-advantaged retirement accounts. Though most Americans qualify for social security, the benefits often fall short of covering all retirement expenses.
Pension funds, once the norm for skilled workers, have largely been replaced by self-funded schemes such as 401(k) or IRA accounts. Given the maximum limit on these contributions, your retirement strategy will largely depend on the types of tax-advantaged accounts available to you.
Once you've chewed over these factors, you can progress to the next stages of your retirement plan:
Your present age and assumed retirement age build the baseline for an actionable retirement strategy. The longer the span from today to retirement, the greater amount of risk that your portfolio can tolerate. As such, individuals with 30-plus years left until retirement can afford to have most of their wealth tied up in more volatile investments, like stocks. These investments have historically outperformed other securities, such as bonds, over extended time periods.
Inflation is another factor to consider. You need returns that beat inflation to maintain your purchasing power during retirement. As an individual draws closer to retirement, the portfolio should lean towards income-centric and capital preservation investments. This implies a higher allocation in less risky securities, like bonds, less jittery, and offer income that you can spend.
Retired adults often splurge on travel or other personal goals during their early retirement years. For this reason, it is essential to have a thorough understanding of your post-retirement spending habits. These can greatly affect the size of your retirement portfolio.
Experts concur that most people believe that after retirement, their annual spending will be just 70% to 80% of their previous spending. This presumption is often proven misguided, especially in situations where the mortgage hasn't been paid off or unexpected medical bills pop up. To avoid common pitfalls, stay realistic about your expenditure expectations, and recognize the impact of your withdrawal rate on the longevity of your retirement portfolio.
The lifespan of humans is increasing, so it's also vital to incorporate your longevity when planning for retirement, so you don’t outlive your savings.
When investing for retirement, you need a suitable portfolio allocation that balances your risk aversion and returns objectives. It's crucial to ensure you're comfortable with the risks taken in your portfolio and understand what's necessary and luxurious.
Given the responsibility of retirement planning falls more on individuals today, the most challenging aspect is finding balance between desired living standards and realistic return expectations. Thus, the best approach focuses on creating a flexible portfolio that can be updated regularly to align with evolving market conditions and retirement objectives.