Did you know that 15% of Americans don’t have any retirement savings? If you’re part of the statistic, you need to understand the importance of retirement planning. You can’t afford to retire without a financial plan in place.
The bills will still be there. Your health will be more demanding. Dependents will still have needs that require your financial input.
Preparation is key in retirement. Whether you’re retiring in a few years or several decades away, you need to know how to plan for retirement. Here are 8 tips to guide you with your financial planning for retirement.
1. Just Start
Time is an indispensable asset when it comes to retirement planning. It’s never too early to start. The first step is essential; you don’t have to get it right.
It would help to establish your retirement plans to know the amount you’ll probably need. Break the number into smaller goals. A target will help you move in the right direction.
You can utilize tools such as an online savings calculator to determine if your spending and savings resonate with your retirement plan. The calculator indicates your savings goals, the number of years towards your retirement, and the estimated yield. An online calculator will give you an amount you need to save every month for your retirement.
Don’t underestimate your retirement financial needs as having fewer savings will be equally frustrating. Once you start, stopping shouldn’t be an option. Your goals ought to be scary enough to keep you on your toes.
2. Establish Your Time Horizon
Your likely retirement age and current age have significant impacts on financial planning for retirement. If you’re still young, your portfolio can stand a greater risk. With more than 30 years before retirement, you can invest your cash in riskier ventures like stocks.
You have to be ready for volatility, which is inevitable in stocks. However, the performance of stocks over long periods is incomparable to other securities. For those with fewer years before retirement, stocks aren’t a good idea.
As you age, your portfolio should focus more on money preservation. Avoid volatile investment ideas. Allocating your cash in bonds other than stocks will be great, as you won’t have worries about inflation.
With the time horizon in your mind, you might want to break the retirement into more simplified components. Breaking the investment strategy into three periods allows you to have realistic retirement goals. You can save with each period in mind.
3. Map Out Your Retirement Expenditure
A retired household spends 22% less as compared to a typical working household. Clothing, food, and housing costs often decline. Healthcare is one of the expenses that increase.
You need to know these expenses as you plan your retirement. The expenditure upon retirement can be high, especially if you’re servicing loans such as a mortgage. Having children in school is another dynamic that might change how you plan your finances for retirement.
More importantly, you’ll need to determine your retirement lifestyle and the expenses that you will have to consider. If you’re planning to travel across the globe or even start a business, plan for it. Your desired retirement lifestyle shouldn’t be an after-thought.
The 80% rule is an ideal place to start. Assuming that you’ve cleared your mortgage and don’t have other major expenses, you can save at least 80% of your income. You’ll adjust the number depending on your retirement income needs.
4. Consider Your Social Security
A significant part of your retirement income will be from social security. This government-run program has significant impacts on retirees and their families. It would help to know more about social security and how it will impact your retirement plan.
Social security benefits should be a top consideration during your financial planning for retirement. You can maximize your benefits to get the best out of your social security. A financial plan will guide you accordingly to ensure that social security resonates with your needs.
While at it, it would help to include other savings projects in your retirement strategy. Depending on social security solely won’t help you to meet your retirement goals. The changing landscape of social security funding shouldn’t be ignored.
Taking your social security benefits earlier will only reduce the funds you’ll be receiving. You can wait when you’re at least 70 to claim your social security benefits. The amount will increase by a significant percent, and you’ll use it to meet most of your retirement goals.
5. Assess Your After-Tax Rate
You need to calculate the after-tax rate of your investment returns once you determine the spending requirements and time horizons. The calculation assesses a portfolio’s feasibility. It would help to know more about tax strategies to set realistic retirement planning goals.
Taxation on investment returns is inevitable regardless of your retirement account. Therefore, you’d want to calculate the actual return rate based on after-taxes. You can control your tax status as you start withdrawing funds from your retirement accounts.
Tax planning for retirement will save you unnecessary surprises. It would be best to reduce the tax bite upon retirement by staying in low tax brackets. It is also wise to diversify your accounts to prompt different taxation.
With the ever-changing taxation laws, you may want to work with your financial advisor regularly. A professional will guide you on how to balance your income and expenses. The goal here should be to cut unnecessary expenditure that increases tax.
6. Supplement Your Financial Resources
Savings from your employment might not be enough if your retirement expenses are over the roof. You can incorporate other financial tools to supplement your resources. The more funds you’ll have, the more positive you’ll be about your retirement.
Purchasing annuities is one of the financial decisions that can prove beneficial once you retire. Annuities refer to the insurance contracts, where you pay a monthly premium or lump sum and get a certain amount later. With an annuity, you’re guaranteed retirement income, which will complement your social security benefits and other savings.
Life insurance is another financial tool that you don’t want to ignore. It has significant financial impacts for your loved ones upon your demise. Some life insurance, such as universal and whole life insurance allows the accumulation of cash value. Consequently, you can borrow money against your cash value to cater to your retirement expenses.
Long term care insurance can also play a central role in ensuring that you meet your retirement goals. With the imminent long-term care needs, your retirement savings might not be sustainable. Long term care policies will help you cover the cost of assisted living without depleting your retirement finances.
7. Health-Savings Account
About 85% of older adults in the U.S. have at least one chronic illness. With old age, deteriorating health is imminent. One of the common challenges faced by older persons is catering to the growing health needs.
Prioritizing your health during your financial planning for retirement is a wise move. A health savings account will address your health concerns in retirement. These accounts allow you maximum savings, and you don’t have to worry about taxation.
Your health plan should be high-deductible to be eligible for health savings account contributions. The funds will help you cater to your health cost at any time. Having health insurance shouldn’t stop you from having a health savings account.
It is essential to keep checking your health to know the best direction to take for maximum benefits. The health savings account will benefit your health after retirement; it will be a great way to save.
8. Work With a Financial Planner
Money matters are complex. How to plan for retirement remains a concern for many people. If you’re in such a dilemma, hiring a certified financial planner is one of the best decisions.
Retirement planning can be daunting, especially if you’ve advanced in age. There’s a lot to think about, from investment to savings. Mistakes in financial planning can spell doom to your retirement.
A financier planner will guide you in analyzing your financial goals. Working with a professional allows you to devise an appropriate plan to manage all your retirement investments and savings. You’ll get significant headway regardless of the possible market volatility. You can get a reliable financial planner from online sources.
You need to settle for a certified financial planner to avoid fraudsters. Scammers often target retirement accounts, and it can take a malicious financial planner to render you a victim. Research widely and vet well to settle for a professional who has desired values.
Financial Planning for Retirement Rests Solely on You
Unfortunately, most people hardly think of their retirement until it’s too late. Failure to have financial planning for retirement will affect your post-retirement life adversely. It is important to consider your goals after your retirement and the financial decisions you need to make to achieve them.
Once you establish your expenses, retirement goals, time horizon, and tax rate, start your journey today. You might want to work with a financial planner for clarity of thoughts.