When it comes to retirement planning, it’s important to clearly understand your lifestyle and estimated expenses. It’s also important to have an emergency account so that unexpected costs don’t drain your retirement savings or throw off your long-term financial plan.
Whether you have a workplace retirement plan like a 401(k) or a traditional IRA, consider maximizing employer matching contributions. The more you save, the more advantage you can potentially gain from concepts like compound interest.
1. Get a Financial Plan
Many retirement planners say you should have savings equal to 80% to 90% of your pre-retirement salary. These figures are helpful, but your situation is unique.
Investing your savings for the long-term can be done in a number of ways. Some of the most common investments include certificates of deposit (CDs), blue-chip stocks, and real estate.
It’s also a good idea to consider adding life insurance to your retirement plan. Though it won’t give you an income in retirement, it can help ensure your family’s finances don’t suffer if you’re unable to work in the future.
Depending on your needs and risk tolerance, your financial professional can help you consolidate and roll over your retirement investment portfolio, determine how much of your savings will generate an expected stream of cash withdrawals to support your spending in retirement, and establish your asset allocation using a method called “dollar cost averaging.” By diversifying your portfolio, you can reduce the impact of any single investment loss or gain.
2. Set Goals
One of the most important aspects of retirement planning is figuring out personal goals. This includes your desired lifestyle and the amount of income you will need to sustain it after you stop working.
This should be based on your current expenses plus anticipated changes in costs, such as rising inflation. A financial planner can help you get an accurate picture of what your retirement will look like and how much you need to save.
Another important factor in setting goals is your time horizon, or how long you have until you are ready to retire. The longer you have, the more money your investments can make via compounding interest. Ideally, you should begin saving as early as possible. This could mean as early as your twenties, though the earlier you start, the better. Even a small amount of savings can become significant over the course of several decades. This is especially true if you continue to save consistently over many years.
3. Make a Budget
A solid budget can help you determine if the money you’re saving in your retirement accounts will last throughout your entire retirement. You can make this calculation by reviewing past bills or online bank statements, and categorizing expenses into essentials and discretionary items.
You should also look at expenses that occur once a year, such as property taxes, auto registrations and home warranties. Add these up to get an annual total and divide by 12 to arrive at a monthly expense amount to include in your budget.
Some expenses will decline once you retire, such as commuting costs, dry cleaning bills and pricey lunches with coworkers. On the other hand, health care costs tend to rise during retirement, and you’ll likely need to pay for your own dental and vision insurance in addition to Medicare premiums.
Having a well-thought-out budget can help you balance these potential increases against expenses that will naturally decrease, and allow you to enjoy a comfortable retirement.
4. Start Saving
In order to determine how much you may need in retirement, create a spreadsheet with your anticipated post-work expenses. Include everything from food and housing to healthcare and taxes. Also, add up any potential sources of income, such as a pension or social security payments. Matching income and expenses will help you understand how your savings can last throughout your lifetime.
Ideally, you should start saving for retirement in your early to mid-20s. This will give your investments time to grow over the years and leverage compounding interest. But don’t fret if you haven’t started yet; it is still possible to achieve a comfortable retirement with proper preparation and planning.
In addition to saving, focus on living a healthy lifestyle. This includes getting regular checkups and preventative care. It is also important to limit new debt and pay off existing debt before you retire. This will minimize the percentage of your retirement income that will be dedicated to interest payments.
