If you want to maintain the same quality of life in the future, a helpful thing to do is plan for your retirement. It's essential if you don't want to rely on Social Security payments or work forever.
A sensible retirement plan includes knowing when to start, calculating how much money you'll need, choosing investments, and picking accounts. You might also consider setting priorities, for example, whether to choose an over-50 funeral plan or put money aside to help pay for your funeral.
In this guide, we'll help you make the right decisions.
When Can You Retire?
You can retire whenever you want to, however, you will need to have an income large enough to replace your salary.
In the US, the earliest you can start claiming Social Security benefits is 62. However, if you file early, you'll have to sacrifice a portion of your benefits. The full retirement age for anyone born in 1960 or later, is 67. If you can delay filing for retirement further, your benefit will increase.
Retirement Planning in 5 Easy Steps
The end goal, if you choose to follow these steps, is to have enough money to stop working and do whatever you want.
1. Know When to Start Planning for Retirement
There is no hard and fast rule. It depends on when you want to, however, the earlier you start planning, the more time your money has to grow.
Don't feel you've already left it too late either because every dollar you save now will be appreciated a few years down the line. If you're strategic with your investments, it won't take you long to catch up.
2. Work Out How Much Money You'll Need
One of the most important things to consider is how much you'll need to retire comfortably. You should base your decision on your current income and expenses and how these will change when you retire.
It's advisable to set a retirement budget because you'll still want to take vacations, go out for dinner, maintain a car, and repair your home.
Ideally, you want to replace between 70% and 90% of your annual pre-retirement income with savings and Social Security.
For example, if your current income is $63,000 per year, you should need between $44,000 to $57,000 per year when you retire.
3. Prioritize Your Financial Goals
It's quite likely that saving for retirement is not your only financial goal. You might want to pay down your credit card or student loan debt. Perhaps you want to build up an emergency fund or take out an over-50 funeral plan.
Whatever your goals, you need to decide which are the most important. It might be a clever idea to save for retirement and at the same time, build your emergency fund. However, at the end of the day, it's down to you to decide.
4. Choose the Right Retirement Plan
A key part of your retirement planning should be deciding where to save, not just how much to save.
A good place to start is to match your 401(k) or other employer retirement plan, if you have one. Otherwise, consider opening a retirement account.
The best retirement plan is one that provides tax advantages and additional savings incentives, such as matching contributions.
If you don't have access to a workplace plan, you might want to consider an IRA. You open this with an online broker or another account provider. There are several types of IRA to choose from, for example:
- Solo 401(k)
- 401(k)
- Traditional IRA
- Simple IRA
- Roth IRA
- Self-directed IRA
- SEP IRA
5. Select Your Retirement Investments
Aside from a retirement plan such as those mentioned above, there are a range of other investments to consider such as stocks, bonds, and mutual funds. You should ask yourself the following questions when thinking about how you'd like to invest:
- How long do you have until you need the money?
- How comfortable are you with taking a risk?
In general, you should invest aggressively when you're young and then dial it back with a more conservative mix of investments as you reach retirement age. Early on you'll have a lot of time to weather market fluctuations. If you experience a few bad years, it's not going to ruin you.
Also, try to allow your investments to evolve alongside you and think about whether you want to manage your retirement savings alone. You can do this with just a small number of low-cost mutual funds. Alternatively, you could hire a financial advisor and benefit from their professional guidance.
Final Thoughts
Now you've got a better idea of what's required in terms of financial planning for retirement, it's time to knuckle down and get the ball rolling. There's no time like the present to decide on your financial goals and do your sums accordingly.
