The sooner you start to plan your retirement, the more cost-efficient it should be. Read this article to get to know how to prepare for retirement wisely and without excessive expenses.
It’s never too early to start planning your retirement. With each decade, life becomes more dynamic and life expectancy increases. When you reach retirement age, it will be nice to realize that you have enough money to be financially independent, cope with medical emergencies and be able to afford enjoyable activities. From this article, you’ll get to know why you should start planning your retirement and how to approach it.
Reasons to Start Retirement Planning
No matter how strong and active you are now, you won’t be able to work forever. You will become more prone to medical emergencies. Most likely, you don’t want to depend on your children — and if possible, you would like to keep contributing to the family budget during retirement.
At the same time, you’ll reach the best age to fulfill life aspirations. You might want to devote yourself to your hobbies, to socialize more and frequently travel around the world. If you rely on only one source of income to satisfy your demands, such as your pension, that might be too risky. Instead, you should start planning early and diversify investments.
Retirement planning might help you to get tax benefits. If you buy insurance before you retire, it might cost you less than for a retired person. Plus, you can secure inflation-beating returns. If you hold your funds in a bank savings account, it will not generate high returns. To earn interest that will be enough to lead an uncompromised retirement, you should start investing early to accumulate a sufficient corpus.
Ideally, you should begin to invest in your retirement as soon as you start earning money. At that stage of life, you still have minimum financial responsibilities. Early investments will help you to reduce your financial burden as you’ll be approaching your retirement age. Such a strategy should help you to average out the impact of market volatility.
Below, you’ll find a list of steps that should help you to plan your retirement.
Determine Your Investment Horizon
To calculate your investment horizon, you should stick to the following formula:
- Decide at which age you would like to stop working
- Deduct your current age from that number
For instance, now you are 30 years old and you want to retire at 65. Then, your investment horizon is 65 – 30 = 35 years.
You should determine until what age you are planning the expenses. For instance, you might want to ensure that your current investments should help you meet your expenses until you turn 85 years old.
Estimate the Expenses
Your current daily expenses might be higher than after you retire. For instance, when you’re 65, you won’t need to pay for your children’s education. You should try to predict how much money you’ll need per day, month and year.
Downsize Your Debt
You might want to pay off your mortgage before you retire. You might consider paying with cash for major purchases to curb new credit card debt. You should strive to minimize the amount of retirement income that will be spent on interest payments.
Diversify Your Portfolio
Ideally, you should invest in assets that give inflation-beating returns. To select such assets, you might want to consult an experienced financial advisor. They will explain to you how you can diversify your portfolio to minimize risks and secure the highest possible income in the long run.
Create a Contingency Fund
It might be hard to calculate precisely how much money you’ll need to spend on medical services after you retire. Your insurance should cover the majority of your routine healthcare costs. Yet you might need supplemental coverage to help pay for your nonroutine healthcare expenses that are only likely to rise over time. Besides, your insurance might fail to cover most long-term care costs.
You might consider buying long-term care insurance, which can help with expenses such as home health aides. The sooner you purchase it, the lower your premiums will be. Plus, insurers will be very unlikely to reject a young client.
Also, you might open a health savings account and put in the maximum contribution to it. You won’t be allowed to use the savings from this account for any other purposes except taking care of your health. If you neglect this condition, you might be subject to income tax and penalties. Otherwise, these funds should be tax-advantaged. Money that you don’t spend will accumulate with tax-free compounding until you need it during retirement.
Plan Where You Would Like to Live
These are just a few options that you might consider.
- Leave the big city and retire in the countryside with low taxes and low cost of living.
- Relocate from the countryside to a big city because your children live there and you can get better access to medical services.
- Move to another country with a warmer climate. In this case, you’ll need to prove that you have a sufficient sum in your bank account.
This decision can significantly impact your future expenses and your retirement planning strategy.
Avoid Using the Funds Kept Aside for Retirement
At some moments of your life, you might feel the temptation to use your retirement savings for good and important purposes, such as getting married or buying an apartment. No matter how noble your motives are, this might become the first step to ruining your retirement plans. Each of your financial goals should have its corpus. You should consistently allocate a certain sum toward your retirement every month and avoid using this money for any other purpose.
Hopefully, this article came in handy. Now, you should better understand why it’s important to start planning your retirement early and how you should approach it. Determine your investment horizon, downsize your debt and try to estimate your everyday expenses after you retire. Diversify your portfolio, create a contingency fund and avoid using prematurely the funds kept aside for retirement. The earlier you start to prepare for retirement, the more comfortable you’ll feel after you stop working.