A Step-by-Step Guide to Retirement Planning
Many people fail to think about their retirement until their 40s or 50s. However, this is a mistake. Putting off retirement planning can force you to postpone your retirement, sell your home and downsize, or otherwise compromise your plans for your golden years.
To make sure you’re fully prepared for your retirement, start planning today if you haven’t already. Here’s a step-by-step guide to getting your finances in the best shape possible for a comfortable retirement.
Step One: Know When to Start Planning
When it comes to retirement planning, there’s no better time to start than the present. Experts recommend that you start planning for retirement in your 20s, as soon as you land your first full-time job. The earlier, the better.
The sooner you start saving and investing money for your retirement, the more time that money will have to grow. This will lead to a larger pile when you’re finally ready to retire decades later.
However, even if you’re well past your 20s and are only just starting to plan, don’t panic! Retirement planning can be started at any time. You may have to save a greater portion of your income to catch up with those who started years earlier, but you can still take action to build up a nest egg.
Step Two: Calculate How Much Money You Need to Retire
The next step to retirement planning is to figure out how much money you will need in order to retire. Remember, the money that you save for retirement is what’s going to function as your income when you’re no longer working.
That means you’ll need to think about your current expenses, as well as what new expenses might arise in retirement, such as higher and more frequent healthcare costs. You’ll need to calculate your retirement income based on that.
One tip for retirement: estimate that you’ll need about 70% to 90% of your pre-retirement income to retire comfortably, with Social Security, your 401(k), individual retirement account (IRA), and other investment accounts and savings contributing to that figure.
For example, if you make $50,000 a year before you retire, plan to need between $35,000 and $45,000 a year once you retire, in order to continue in your current lifestyle without significantly downsizing.
Step Three: Prioritize Financial Goals
People generally have more financial goals than just retirement. These goals might include paying off a mortgage, funding their children’s college education, or buying a vacation property.
In general, it’s good to aim to save for retirement as well as for other financial goals, if possible. You can do so at the same time.
Remember, a little goes a long way. When it comes to retirement planning, even putting aside a little bit each month can be a great way to steadily build up your savings.
Step Four: Choose a Retirement Plan
Choosing a retirement plan is a key part of saving for retirement. You generally have two options for starting a retirement plan:
- Employer-sponsored retirement plans
- Individual retirement plans
If your employer doesn’t provide a retirement plan like a 401(k), Roth 401(k), or pension, you can open your own account. Even if you have access to an employer-sponsored plan, it’s often a good idea to open another account on your own.
Retirement accounts that you can open on your own, without an employer, include the traditional IRA and the Roth IRA, both of which provide tax advantages. With a traditional IRA, contributions are tax-deductible in the year they are made, and withdrawals from the account when you’re in retirement are considered taxable income. In contrast, with a Roth IRA, you cannot deduct your contributions when you make them, but your withdrawals from the account when you’re retired are tax-fee. Both accounts come with a yearly maximum contribution limit of $6,000 in 2021 or $7,000 if you are 50 or older. Early withdrawals before retirement age can incur a penalty tax.
If you’re an employer or self-employed, you have other options as well. You can consider a Simplified Employee Pension (SEP) IRA or SIMPLE IRA. Similarly, if you’re a business owner without any employees, you can open a solo 401(k).
Step Five: Choose Your Retirement Investments
When you open an investment account like a 401(k) or IRA, you’ll have to make decisions about where to allocate your money.
In general, it’s a good idea to focus on investing more aggressively during your younger years: you can take bigger risks and potentially reap bigger gains, and you have decades to recover from losses. Usually, as you grow older and your retirement draws near, your investment strategy should become more conservative.
In addition, it’s also important to revisit your investment strategy every year—saving for retirement isn’t a “one and done” job. You may need to adjust your strategy based on job and income changes, family growth, inheritances, and other major life events.
With these tips, it’s easy to start planning for retirement. By following this process, you can get started saving for your golden years and position yourself for a comfortable retirement.