Planning your retirement is one of the most important things to work on. It is a process that constantly evolves, but it has always had the same objective: after you decide to retire, you hope to be able to live a comfortable life and not worry about your money. According to the United States Government, only half of Americans have thought about their retirement and up to 25% of the people that have access to a contribution plan choose not to participate.
The process of retirement planning starts with setting a goal. How much money would you like to have available when you retire? Depending on your retirement goals, you can now get together a plan that suits your retirement goal.
Before you start your retirement planning think about this:
- Time horizon
Not everybody starts working on their retirement plan at the same age. Your current age is important because it sets a ground where you can start defining the best strategy to reach your retirement goals.
You may have various goals, such as paying for education, a new house or having enough money available to avoid worrying about your financial situation. Various goals mean various time horizons need to be set.
Your spending needs are something to consider. People often consider that after retiring they will cut their spending needs, but that is not realistic. When someone retires, he or she has more time to try different activities like traveling, shopping, or even getting involved in a new hobby. All of which costs money. Setting a realistic projection of your spending needs is key to defining your strategy and living the life you want to have when you retire. It is estimated that you will need something in the range of 70% – 90% of your pre-retirement income to maintain your standard lifestyle.
- When should you start?
The quick answer is: now. The earlier you start, the better strategy you are able to plan. You can visit this article where we talk about how much you need to save for your retirement based on your age. It is possible to start your retirement planning at any stage of your life, one dollar saved is better than zero dollars and certainly your future self will appreciate any savings you have.
- How much should you save?
As we explained above, experts recommend saving enough to get something around 80% (average) of your pre-retirement income. If you are able to replace that percentage with your savings, you will have the possibility of retiring with your pre-retirement standard lifestyle.
- Retirement plans
See if your workplace offers any retirement plans like a 401(k). This is usually a good place to start, but keep in mind that there is no “perfect” retirement plan, you have to look for the small advantages you get with each plan, like tax benefits or saving incentives. There are different retirement plans, but the most common are:
This is offered by employers. Your contributions for this plan will be automatically taken from your paychecks. You can contribute up to $20,500 (2022) per year. With this plan, you will pay taxes when you start withdrawing the money.
In this retirement plan you will get pre-tax dollars, meaning that you will pay taxes when you withdraw the money. You also have to start doing the Required Minimum Distributions by the age of 72, whether you need the money or not. Your access to the money is more restricted, but you get deductions on your contributions in return.
- Roth IRA
With this retirement plan you will get after-tax dollars, which means that you will pay taxes now and your withdrawals will be tax-free. With this plan you are not forced to make money withdrawals at any age, but you must have the account for at least 5 years to avoid paying any taxes. Keep in mind that you will not get any tax deductions with this retirement plan.
You can go to this article to find out more about these retirement plans and which should you choose depending on your goals for retirement.
- Financial Goals
We have talked about different goals and time horizons. You should try to save for retirement at the same time that you are reaching your other goals, like paying off your debt. This might seem like you will not have any room to use your current money, but with a proper budget in place, you can achieve all your goals.
- Retirement investments
When you open a retirement account, you will be able to choose among a range of assets where you can invest. Those can be bonds or stocks. The mix of assets you choose should match the stage of life you are at. You also need to be comfortable with the level of risk you face with your retirement account. For example, someone that currently has 57 years might choose less volatile assets for the account. On the other hand, someone that has 20 years might be choosing more volatile assets expecting a bigger return. Although, the second person has more years to recover the money if the assets lose value at some point.