5 Steps You Should Take Now to Plan for Retirement
Benefits of retirement planning vary for each individual, Retirement planning is not a one-size-fits-all approach. The amount of money that each individual needs to live comfortably during those years depends on many different factors. In addition, the plans you make now are likely to evolve over the course of your working years.
To feel prepared for and achieve peace of mind about your retirement years, you need to set a strong foundation through planning that will ensure you live those years to their maximum.
While the process might not sound glamorous, the benefits of retirement planning far outweigh the time and effort, saving you time, money, and difficulties due to unforeseen events in the long run.
The question everyone has on their mind when entering retirement planning is, “how much money will I need?” Here we outline the steps needed to construct a solid plan while answering this very important question.
1. Start early. This is likely not new advice to you, but it has always remained true. The earlier you start planning for retirement, the better off you and your money will be by the time you are able.
The earlier you start, say, in your 20s, the riskier you can be with your investments, because realistically you will not need that money for years to come. Whereas if you are saving later in life, you would want to focus your investments on less risky, more stable securities, so that you are ensured to have money to live on.
This being said, it is never too late to start planning and saving. Regardless of where you are in life, the benefits of retirement planning are best maximized by saving whatever you can right now.
2. Identify and prioritize your goals. While it is worthwhile to place your hard-earned money into saving for retirement, it might not be your highest priority depending on the existing debt you have, and other goals that you may be working toward.
For example, you would not want to enter retirement with outstanding credit card debt or student loans, so a higher priority of yours may be paying this debt down first while you allocate a smaller portion of your income to retirement.
You may also be allocating savings toward other life goals, such as supporting a child through college or a home improvement project.
Identifying and prioritizing your goals will help you determine just how much money you can feasibly put toward retirement savings now, and when you can expect to add more in the future.
3. Identify how much you will need. When considering the amount of money you will need to be able to live comfortably on during retirement, you need to set realistic expectations regarding your spending habits.
According to Fidelity, you should expect to spend 55-80% of your current annual income while in retirement. You can expect to spend less than you do now on items such as housing, due to downsizing or moving to a cheaper location, but you may spend more on healthcare.
The 25% gap in the percent above is also due to the nature of lifestyle that one expects to live while retired. If you plan to be very active during that time, you will want to increase the amount of spend you are budgeting for.
There will always be unforeseen factors that impact your overall spend – cost of living is steadily increasing, and people are living longer. One of the many benefits of retirement planning is to mitigate against these events.
Identifying your current, primary buckets of spend now will help you identify what you can expect to increase as well as decrease during the time in which you wish to retire, while adding in some cushion for the unforeseen.
4. Assess your risk strategy. We briefly touched on risk in the first item but will expand upon it here. Contemplating how much risk you are willing to take within your investments is going to influence the retirement plan(s) you choose.
With all the unpredictability within the market in recent years, how can one still apply a certain amount of risk to their retirement savings to maximize their money while also protecting what they have? The answer lies in a balance of risk and considers factors such as the goals you identified above, your income, and your age.
One of the benefits of retirement planning at a younger age is the higher amount of risk you can afford to take with whatever amount you are comfortable allocating. This risk should be scaled back over time as you approach your desired retirement age.
Generally, it is not a good idea to consistently change your long-term investments based on short-term market fluctuations, as they tend to even out over time. Hiring a financial advisor is a simple way to have someone watch the market for you and assess changes to your plan accordingly.
5. Pick a plan. Now that you have considered all the factors surrounding how much money you should be saving, it is time to pick the right type of plan for your needs and goals.
Between 401(k)s, IRAs, and annuities, it can get overwhelming fast. Each of these plans have their own unique advantages as well as tax implications, but the good news is that all of them can be profitable. You can read more about each type of plan through the IRS website.
If your current employer offers a retirement plan, it might be best to start there. Knowing how much your employer contributes to the plan will help you understand if this plan is sufficient for your needs, or if you need to supplement your savings by opening another retirement account externally.
If your employer does not offer a retirement plan, you can work with a financial advisor to choose and open a plan for you or utilize one of the many easy-to-use websites online.
As we have outlined here, the benefits of retirement planning are numerous. Starting your planning process now will have positive, far-reaching effects into your ability to retire at your desired age.
Keep in mind that this process will, as it should, evolve based on your life events and does not have to be perfect from the beginning. Allocating even a small amount will put you on the path toward a happy, fun, and carefree retirement.
