Retirement is within reach when you make the right decisions at an early stage in life. Planning is the most important action to take when saving for retirement since it ensures that you are setting aside enough money to live comfortably while eliminating worries about your future.
Once you have developed a retirement plan, you can spend the rest of your life focused on your short-term priorities without having to lose sleep over the possibility of working until you die. Taking the time to develop a retirement plan today will, therefore, set you on a path to a bright financial future.
What You Need to Know
When developing a retirement plan, it is important to make sure that you avoid missing any key considerations. Many people who fail to retire comfortably make the mistake of assuming that their pensions or social security benefits will be sufficient to fund their ordinary lifestyle. Unfortunately, most pensions do not provide enough income to maintain your standard of living, and social security benefits yield only a small fraction of your usual salary. To obtain the funds necessary to retire, you should start building your own retirement savings while you are still in your working years.
1. Calculate your ideal retirement income
Before you can do any planning, you will first need to determine how much money you will need to maintain your lifestyle in retirement. In general, experts advise workers to plan on having at least 70 percent of their ordinary monthly income in retirement. However, you may be able to get by with less money if you live in a jurisdiction that has low property taxes and plan to have your house paid off before retirement.
2. Project your social security benefits
Most people do not bother to consider the value of their social security benefits until they are near retirement age. Although the rules are likely to differ when you are at the point of retirement, you can still project the approximate value of your future benefits.
Projecting how much money you can expect to receive from social security will help you to understand how much supplementary income you will need to get through retirement. When making your projections, you should also take note of how substantial retirement savings can potentially reduce the benefits that you will receive.
3. Know the value of your pensions
As with social security benefits, you will also need to understand the value of your pensions before planning for retirement. If you have received pensions from multiple companies, make sure that you know the total aggregate value of these benefits programs. You should also ensure that the value of your retirement savings will not reduce the income you can expect to receive from pension distributions.
4. Evaluate your employer’s retirement plan
Reputable employers usually offer benefits to help their workers retire, such as pensions and 401(k) match programs. Unfortunately, some people fail to take full advantage of their employer’s retirement initiatives, and this can have a severe impact on their financial future. Many people who analyze their employer’s retirement plan are surprised to discover that they failed to take advantage of several valuable benefits that can make retirement more affordable.
5. Decide how you want to live
Once you have a thorough understanding of the income that you can expect to receive in retirement, you can start to determine how much you will need to save to live the lifestyle of your choice. Some retirees are willing to get by with less, so they can retire at a young age. Likewise, you might also choose to continue working until an older age to enjoy a higher standard of living. Regardless of how you want to live, you should make your lifestyle choices at an early point in life so that you can prepare for the future.
6. Calculate how much you need to save
With an understanding of how much retirement income you require, you can start to determine how much you will need to save to actualize your dreams. For every $1,000 in retirement income, you will need to have about $240,000 in your bank account at the point of retirement.
If you are saving for retirement at a young age, you can expect to accrue a significant amount of interest on every dollar that you save. Accurately calculating how much money you will need to set aside each month will ensure that you will not gradually lose your chance to retire as time goes on.
7. Avoid withdrawing your savings
People who start saving for retirement often make the mistake of inventing excuses to withdraw their savings. Early withdrawals for financial emergencies, such as medical issues or lawsuits, can make sense. However, most people who make early withdrawals do so for consumption with short-term benefits. If possible, you should avoid making any withdrawals from your retirement accounts.
Common Retirement Savings Plans
When you start developing your retirement plan, you will need to choose the type of retirement account that you will open. The U.S. government has codified three main forms of retirement accounts that can offer advantages in some situations.
The most basic form of retirement plan is a 401(k) plan. When you put money into a 401(k) account, you can deduct the value of your contributions on your tax return each year. The advantage of a 401(k) plan is that it enables you to earn compound interest without having to worry about paying taxes until you make withdrawals.
Additionally, employers often offer to match your 401(k) contributions up to a certain percentage of your salary. If your employer offers a 401(k)-match program, you should ensure that you take full advantage of this program to avoid letting free money go to waste.
IRA accounts are similar to 401(k) retirement accounts because they let you accrue interest on your savings without having to pay any taxes. In many cases, you can enjoy greater flexibility with an IRA plan.
For example, you can use income that does not come from employment to fund your IRA. The downside of an IRA, however, is that you can only contribute $5,500 per year. In contrast, 401(k) plans let you contribute up to $18,000 per year.
3. Roth IRA
When you retire, you will have to pay taxes on any funds that you withdraw. With a Roth IRA, however, you can avoid having to pay taxes when you withdraw your money. The downside, though, is that you will have to pay taxes immediately when you contribute funds to your account. Roth IRAs can be advantageous when you project to withdraw large amounts of money in retirement that will be taxed at a high-income tax rate.