Have you ever been reminiscing about a moment in college or high school, and then it just suddenly hits you how long ago that was?
Time flies! And believe it or not, retirement will be here before you know it.
So…are you prepared? Or at least preparing?
If you aren’t sure how to plan for retirement, don’t worry. This is your ultimate guide to retirement planning.
How to plan for retirement
Before I start, I want to mention that saving for retirement is one of the last steps on our wealth-building roadmap, so if you have high-interest rate debt or don’t have an emergency fund saved up, you may want to prioritize those before tackling your retirement savings.
But if you’re ready to start planning your retirement, here are 4 steps for getting started:
1) Picture your life in retirement
Think about what you want your dream retirement to look like. This could include things like…
- At what age are you retiring?
- Where are you living?
- Do you travel?
- Do you have a part-time job?
- What hobbies are you pursuing?
Obviously, this may change as you get closer to retirement, so feel free to adjust! But it can be helpful to have an idea of what you want your retirement to look like.
2) Figure out how much money you need to retire
To figure out how much you’ll need to retire, look at your current expenses and figure out which will change in retirement and which won’t.
For instance, if you have kids, you probably won’t still be paying their bills after you’ve retired. But maybe you still want to set aside some money for a family vacation. Factor in expenses like housing, healthcare, food, transportation, and entertainment.
If you don’t want to add up your expenses, the other way to estimate your retirement needs is to calculate 70% to 90% of your annual pre-retirement income.
For example, a retiree who earns an average of $63,000 per year before retirement should expect to need $44,000 to $57,000 per year in retirement.
Depending on when you plan to retire, multiply that annual amount by the number of years you plan to be retired to find out how much you need to save in total.
3) Pick the best retirement account for you
Now that you have an idea of how much you’ll need to save, it’s time to think about something equally important: where to save it.
If your company offers an employer-sponsored retirement account, like a 401K or 403B, then that’s a great place to start. Those accounts may offer employee matching, which can be a huge help in building your retirement fund. (And if your company does offer employee matching, take full advantage of it! This is free money!)
If your workplace doesn’t offer a retirement plan, then you’ll need to open one of your own. In fact, even if your company does offer an employer-sponsored account, opening an additional retirement account is still a good idea.
There are 4 types of Individual Retirement Accounts (IRAs) that you should know about:
- Traditional IRA: Contributions may be tax-deductible, and earnings grow tax-deferred until withdrawal. Withdrawals are taxed as ordinary income.
- Roth IRA: Contributions are made with after-tax dollars, but qualified withdrawals, including earnings, are tax-free. Roth IRAs also offer more flexibility with withdrawals.
- SEP IRA: Simplified Employee Pension (SEP) IRAs are designed for self-employed individuals and small business owners. Contributions are tax-deductible, and withdrawals are taxed as ordinary income.
- SIMPLE IRA: Savings Incentive Match Plan for Employees (SIMPLE) IRAs are available to small businesses with fewer than 100 employees. Employees contribute through salary deferral, and employers may make matching or non-elective contributions.
And while not a retirement account per se, you can also use a Health Savings Account (HSA) to grow your retirement savings. Contributions are tax-deductible, earnings grow tax-free, and withdrawals for qualified medical expenses are tax-free.
Learn more about the different types of retirement accounts and how to pick the best one for you!
4) Select your retirement investments
To pick your retirement investments, you first need to understand your own risk tolerance. This involves assessing how comfortable you are with market fluctuations and potential losses.
If you still have a ways until retirement – say, 40 to 30 years – you may be willing to take on more risk because you have more time to ride out the ups and downs of the stock market. But as you get closer to retirement, you may want a more conservative approach since you don’t have as much time to financially recover from any losses.
When building your retirement portfolio, diversification is key. By spreading your investments across different asset classes, industries, and geographic regions, you can reduce your risk. It's important to understand the various investment options available, including stocks, bonds, mutual funds, ETFs, and alternative investments, and to choose those that align with your objectives and preferences.
How to pick the best investments for YOU!
Now, if that sounds like a lot of work, you can always opt to invest in target date funds.
Target date funds are investment vehicles that automatically adjust their asset allocation based on an investor's target retirement date. These funds typically start with a more aggressive allocation of stocks and gradually shift towards a more conservative mix of bonds and cash equivalents as the target date approaches. They offer a hands-off approach to retirement investing, making them a convenient option if you prefer a set-it-and-forget-it strategy aligned with your retirement timeline.
Final Thoughts
That’s it! If you follow those steps, you should be in good shape for retirement.
45 or over and worried about not having enough time to save and retire? Check this out!
And if you want to learn how to manage your money pain-free using the simple system thousands of women have used to pay off debt and grow their money, be sure to check out our free masterclass!
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