Retirement planning is a long-term process that gradually becomes more detailed as time goes on. If you want to enjoy a retirement that is both comfortable and secure, you need to save up enough money to finance it. The good news is that paying attention to the less exciting aspects of retirement planning can actually be enjoyable, because it means you are one step closer to achieving your goal.
The goal is to have enough saved so that you can cover your costs in retirement and live the lifestyle you want. The first step to planning for retirement is to think about your goals and how long you have to achieve them. Then, you need to look at the different types of retirement accounts that can help you raise the money you need. Once you have saved up the money, you need to invest it so it can grow.
The last, and perhaps most surprising, part of retirement planning is taxes. If you have received tax deductions for the money you have contributed to your retirement accounts over the years, you will face a significant tax bill when you start withdrawing those savings. However, there are ways to minimize the tax burden while you save for the future, and to continue doing so when you actually retire.
A recent IPSOS/USA Today survey found that 59% of 45-to-65-year olds felt very or somewhat prepared for retirement. The same percentage said they expected to rely mostly or entirely on their own savings to fund their post-career life. However, only about a third had set aside even $250,000, while another third had saved less than $100,000. These findings suggest that some people could be in for a rude awakening come retirement time. To get a better handle on whether you’re really on track when it comes to retirement, ask yourself these three key questions.
Will You Be able To Generate Enough Income To Maintain Your Standard Of Living In Retirement?
The amount of money in your retirement account is not a good way to tell if you are saving enough for retirement. This is because the amount you will need to save to support yourself for 30 years or more is much more than most people have in their retirement account. For example, if you have a retirement account with $500,000 in it, you will only be able to withdraw $20,000 a year without running out of money.
Instead of focusing on how much money you need to have saved up, focus on whether or not you’re saving enough to replace your income and maintain your lifestyle when you retire.
How Much Do You Need to Save for Retirement?
One’s retirement goals will depend on many situational factors, such as their annual income and the age when they plan to retire.
There isn’t one definite answer to how much you should save up for retirement, but many experts have estimated that a good rule of thumb is to have saved up around $1 million, or 12 years of one’s annual income pre-retirement. Another suggestion that is often made is the 4% rule, which says that retirees should spend no more than 4% of their retirement savings each year so that they can have a comfortable retirement.
Do You Have The Right Mix Of Investments?
The longer you have until you retire, the more of your retirement savings you should invest in stocks, as they have the potential to generate higher returns than bonds, money-market funds, and savings accounts. However, stock returns are also more volatile, so there is more risk involved. If you’re still many years away from retirement, you have time to make up for any stock market losses.
An Employee Benefit Research Institute study found that in the months leading up to the 2008 financial crisis, more than four in ten 56-to-65-year-olds had more than 70% of their 401(k) invested in stocks and nearly 25% had more than 90% of their account in equities. That exposure left them vulnerable to gut-wrenching setbacks on the eve of retirement.
How Will You Actually Live In Retirement?
You should estimate that you will need to have 70% to 90% of your pre-retirement income to have a comfortable retirement. However, once you get within 10 years of retirement, you should try to get a more accurate estimate of how much you will actually spend. To do this, you will need to think about how you will spend your time in retirement and what your schedule will be like.
Some things you’ll want to consider when planning for retirement are whether you’ll stay in your current city or move somewhere new, if you’ll downsize your home to save money, how much traveling you’ll do, and if you’ll want to keep working part-time.
Factors To Consider
Some things to think about as you begin to plan for retirement: – What are your family plans? Having children can impact your savings, so this is an important factor to consider. – What is your retirement lifestyle going to be like? Do you plan to travel or stay home? – How much money do you realistically need to retire? This number will be different for everyone.
Understand Your Time Horizon
The amount of time you have until you retire affects how much risk you can take with your investments. If you’re young and have 30 or more years until retirement, you may want to have most of your assets in riskier investments like stocks. There will be ups and downs, but stocks have generally done better than other investments like bonds over long periods of time. Keep in mind that “long” here means 10 years or more.
In order to keep up with inflation and have enough money during retirement, you need returns that are higher than the rate of inflation. Chris Hammond, a financial advisor and the founder of RetirementPlanningMadeEasy.com, compares inflation to a small acorn that over time can grow into a large oak tree.
Hammond explains that inflation is like “compound anti-growth” because it reduces the value of money over time. He states that a small inflation rate of 3 percent will reduce the value of savings by 50 percent over approximately 24 years.
Determine Retirement Spending Needs
If you want to know how much you need to save for retirement, you should start by looking at how much you expect to spend each year. Most people believe that they will spend less in retirement than they do now, but it’s still a good idea to be realistic when estimating your future spending.
Assumptions that you will have no expenses in retirement are often unrealistic, especially if you still have a mortgage or may have unforeseen health and medical expenses. Retirees sometimes also spend their first years of retirement splurging on travel or other things they have wanted to do.
According to David G. Niggel, CEO of Key Wealth Partners LLC in Litilz, Pa., the ratio of current income to retirement income should be closer to 100%.
The cost of living is increasing every year—this is especially true for healthcare expenses. People are living longer and want to have a good quality of life in retirement. Retirees need more income for a longer time, so they will need to save and invest more money.
Calculate After-Tax Rate of Investment Returns
The required rate of return must be calculated to assess the feasibility of the portfolio producing the income that is needed. An expected rate of return that is 10% or more (before taxes) is normally not an realistic expectation, even for long-term investing. As you age, this return threshold goes down, because low-risk retirement portfolios are mostly made up of low-earning fixed-income securities.
If an individual has a retirement portfolio worth $400,000 and needs an income of $50,000, they would need a 12.5% return on their investment to get by. However, if that individual started planning for retirement at an earlier age, they would have been able to grow their portfolio to safeguard a more realistic rate of return. For example, if that individual had a gross retirement investment account of $1 million, the expected return would only be 5%.
Assess Risk Tolerance vs. Investment Goals
The most important step in retirement planning is to balance the concerns of risk aversion and returns objectives, whether it’s you or a professional money manager who is in charge of the investment decisions. How much risk are you willing to take to meet your objectives? Should some income be set aside in risk-free Treasury bonds for required expenditures?
It’s important that you’re okay with the risks in your portfolio and can differentiate between what you need and what is a want. According to Craig L. Israelsen, Ph.D., designer of Twelve Portfolio in Springville, Utah, you shouldn’t be a “micro-manager” who lets small market changes dictate your decisions.
Stay on Top of Estate Planning
Planning your estate is an important part of retirement planning, and you will need the help of different professionals, such as lawyers and accountants, to make sure everything is set up correctly. Life insurance is also an important part of your estate plan, and it’s important to make sure you have enough coverage to support your loved ones after you die. Having a well-planned estate will also help you avoid a costly and time-consuming probate process.
Frequently Asked Questions
What Is Risk Tolerance?
How much risk you are willing to take on in your investment portfolio is determined by your risk tolerance. This can be influenced by a number of things, such as what your financial goals are, how much income you have, and your age.
How Much Should I Save for Retirement?
One general rule of thumb is to save 10-25% of your gross annual earnings every year. In an ideal world, savings would begin in your 20s and last throughout your working years.
What Age Is Considered Early Retirement?
The age of 65 is generally seen as the start of retirement, but with Social Security, you can begin collecting retirement benefits as early as 62. However, if you wait until full retirement age to collect them, you will receive more benefits than if you start collecting them early.
The Bottom Line
These days, it’s mostly up to individuals to plan for retirement, rather than relying on employers. Few people working in the private sector can expect their employers to provide a pension, and even fewer employers manage their investments.
One of the most difficult things about making a retirement plan is deciding how much you want to live on and how much you can expect to earn. The best way to handle this is to have a portfolio that can be changed as needed to fit your retirement goals and the market conditions.
Leave a Reply