Planning for retirement can be a daunting task. You have to figure out how much to save, determine the right ways to save that money and then make sure you’re consistent while constantly making adjustments to your approach over time. If you’re not experienced in investing and managing finances then you might not know where to start and you may never feel confident that you’re prepared for your retirement years. Here are 10 ways that can help you feel a lot more confident and actually properly prepare for your golden years. However, for individualized advice, consider working with a financial advisor.
1. Calculate How Much Money You Need to Save
Do you know how much money you need to save for your retirement? Fully understanding your financial needs for retirement should be the initial move you make in retirement planning. However, it also could be the most important. If you don’t have a precise estimate of how much money you’ll need, devising an effective savings and investment strategy becomes very difficult.
Imagine this: Underestimating retirement savings could leave you financially strained and affect your quality of life during retirement. According to the government, just over half of Americans aged 55 and over have some retirement savings. And those who fall short may have to lean heavily on Social Security, which averages out to be just north of $21,000 per year. That’s not enough for most people to live on, which means properly calculating your retirement needs is paramount if you ever want to retire.
2. Save Early and Consistently
Seeing the value of timing and consistency is crucial when planning for a successful retirement. Many young individuals often overlook the importance of saving for retirement. It’s so far away that it’s difficult to see its importance for many, who choose to focus on short-term financial goals instead. However, by starting to save early and consistently, you can significantly impact your retirement funds, setting the stage for a more comfortable and secure future.
The longer your money is invested, the more time it has to grow into long-term and sustainable wealth. Additionally, starting early affords you greater flexibility, allowing you to save less each month but still accumulate substantial wealth due to the extended investment horizon. Thus, prioritizing saving for retirement as early as possible, regardless of your income level or other financial commitments, is one of the most important things you can do to plan for retirement.
Alongside starting early, maintaining a regular saving habit is equally important for successful retirement planning. Consistency in saving not only allows you to leverage the power of compound interest effectively but also ensures steady wealth accumulation.
For instance, imagine an individual who saves consistently for 30 years versus one who saves sporadically within the same period. The consistent saver, depositing $200 monthly into a retirement account with a 7% annual return, would have around $243,000 by retirement. In contrast, the sporadic saver who only manages to save for 10 out of the 30 years would end up with approximately $81,000. That can be the difference between retiring and just getting by during your golden years.
3. Invest Into an IRA Every Year
An Individual Retirement Account, or IRA, is an essential component of a comprehensive retirement strategy. This type of savings account, specifically designed for retirement, offers substantial tax benefits that can greatly augment your retirement savings over time. It allows you to invest in a tax-advantaged account that can grow your money in addition to investing in your employer’s 401(k).
There is a maximum amount you can contribute to these accounts each year. For 2023 it was at $6,500, and that increases to $7,000 in 2024. That’s why it’s important to invest in these accounts as early as you can because you’ll be limited to how much money you can grow later on.
4. Find the Right Balance in Your Portfolio
Investing for retirement is not just about saving money but it’s also about strategically allocating your savings across a variety of assets to maximize returns and minimize risk. This is where the concept of portfolio balancing comes in. The balance of your portfolio refers to the proportionate distribution of your investments across different asset classes, such as stocks, bonds, real estate and more. It can also refer to investing in a variety of industries, countries or markets. It’s akin to not putting all your eggs in one basket if you don’t have balance in your investments.
For example, think about a person who invests all their retirement savings in the stock of a single company. If the company performs poorly, they risk losing a significant portion of their savings. However, if they spread their investments across a diverse range of assets, they can mitigate this risk and potentially enjoy more stable returns over time, even if one or two struggle at times. Finding the right balance for your portfolio can help you get ahead when it comes to retiring on time.
5. Get Help With Retirement Planning
Retirement planning can be a complex and daunting task. It’s not just about setting aside money for the future, but also about comprehending the intricacies of various investment vehicles, managing risks and planning for longevity. Navigating the labyrinth of tax laws, investment options and estate planning considerations can often overwhelm the best of us. In such a scenario, professional assistance can indeed be beneficial.
Investment professionals, such as financial advisors can bring specialized knowledge and expertise to the table. They can help you understand your financial needs, devise a retirement strategy and make informed decisions. Many hold licenses or certifications that show their knowledge of specific scenarios. For instance, a certified financial planner (CFP) can provide comprehensive financial planning, encompassing retirement, tax and estate planning advice. Having the right professional on your side can make a huge difference, no matter how much you’re investing each year.
6. Understand Social Security Benefits
Understanding Social Security benefits is a crucial aspect of retirement planning since so many people rely on these benefits for at least part of their income. But what is Social Security exactly? It’s a federal program that provides financial benefits to retirees, disabled people and their survivors. Established in 1935 as part of President Franklin D. Roosevelt’s New Deal, the program was designed as a safety net for the elderly and those unable to work.
Today, it’s a significant income source in retirement planning for many Americans, who pay into the program with each paycheck. These benefits make up a huge percentage of the income for many retirees. So, the importance of having a comprehensive understanding of these benefits cannot be overstated. It’s key to planning an efficient retirement and ensuring a steady income stream. You’ll likely want to see how these benefits can work with your other retirement income sources in order to maximize what you can earn after you stop working.
7. Plan to Live for 30+ Years in Retirement
The concept of retirement has evolved over the years, with increased life expectancy and changing socio-economic conditions. Retirement shouldn’t just be thought of as a destination. Instead, it’s a long journey that could span several decades. More people are living to 100 than ever before thanks to modern medicine and better habits, and most people aren’t prepared to be retired for 30+ years if that happens to them. Today, planning for longevity is a critical aspect of retirement planning that demands attention and foresight.
Imagine a retiree who financially planned for 20 years of retirement but lived for 30 years. Those extra 10 years could potentially put a significant financial strain on the retiree, if not adequately planned for. It could mean living in an environment that can’t meet your specific needs or is in a location that isn’t close to family. These are issues that are a lot easier to deal with before you retire, instead of getting to the point of running out of money.
8. Know and Live By Your Risk Tolerance
Understanding one’s risk tolerance is not just a fundamental aspect of successful retirement planning, but also a critical step that can shape the trajectory of your financial future. To put it in perspective, consider a retiree who invests heavily in high-risk stocks. If the market plummets, they can lose a significant portion of their retirement retirement savings, which could have been avoided had they been aware of their risk tolerance.
Risk tolerance is all about how much investment risk you can take at any point in time. Think of it as your financial pain threshold. It’s the degree of variability in investment returns that an individual is willing to withstand in their financial planning, which can vary depending on your situation and age. High-risk investors are comfortable with taking on more risk for potentially higher returns, and low-risk investors prefer safer, more predictable investments. Typically, the older you become the more low-risk you need to be, but you may want to work with a professional to know for sure.
9. Create a Retirement Budget
Even if you save enough money, you aren’t guaranteed to spend it the right way once you retire. Understanding your financial needs for retirement is essential for maintaining a comfortable lifestyle for the rest of your days. This is where the creation of a retirement budget comes into play. A retirement budget is a financial plan that estimates the income and outgoings during your retirement years. It is a roadmap that guides you on how much you need to save and invest to live comfortably in retirement.
Making your retirement budget ahead of time can help you properly prepare, and it will help you save enough money. It’s important to regularly review your retirement budget, as it’s not a static document but instead should be considered a dynamic plan. It should account for various income sources and expected living expenses. Income sources could be from social security, pensions, annuities or part-time work. Expected living expenses include your daily expenditures such as groceries, utilities, and housing. Have you considered how healthcare costs will impact your retirement budget?
10. Don’t Touch Your Retirement Savings Until You Retire
Imagine a future where you can enjoy your golden years without the stress of financial instability. This future is possible when you adhere to the golden rule of retirement planning: leave your retirement savings untouched until you retire. Although this rule can be challenging to follow, especially during financial hardships, the benefits of preserving your retirement savings are truly remarkable.
Untouched retirement savings bring several critical advantages. The most significant of these is the power of compounding interest and making sure your money doesn’t get depleted before you even retire. Moreover, untouched savings provide a stable financial safety net during retirement, ensuring that you can maintain your lifestyle and cover unexpected expenses without stress.
Plus, depending on what type of retirement account you have, you could be charged fees or penalties for withdrawing money early. All in all, keeping money where it is until your retirement budget says to withdraw it is probably the right move.
Bottom Line
Retirement planning is something that takes action and consistency if you want to get it right. Most people aren’t currently saving enough money by the time they retire in order to financially reach their goals for the rest of their life. The earlier you plan, the better, but following these ten steps can help make all the difference in making sure you’re prepared for the retirement you want.
Tips for Retirement Planning
- Retirement planning can be hard as there are so many things to think about and so much effort that needs to go into making sure you have enough money to last through your entire golden years. A financial advisor can help make sure you save enough money and help you create a plan to get there. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- You can also use a retirement calculator to estimate how much you might need to retire with the lifestyle you want.
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