Everyone desires a peaceful life after retirement, where they can pursue their passions and gain a sense of fulfillment. But to achieve this lifestyle, one must make informed financial choices throughout one’s career, including planning one’s retirement timeline. This process includes setting long-term financial goals and risk tolerance and working toward achieving them. But retirement planning isn’t a day’s work. To minimize risks and maximize savings, one should follow a multifaceted approach.
Long-Term Retirement Planning Guide
Planning for retirement involves setting a timeline of actions to take, ensuring one can live comfortably after one stops working.
1) Set the Goals
The first step in retirement planning for beginners is to outline goals for the golden years. Start by making a timeline for retirement and having a clear idea of the lifestyle one wishes to lead. This can be anything, from traveling the world to spending more time with family. Having clarity in goals will also help one determine how much income one needs each month during retirement.
2) Assess the Current Financial Situation
One can evaluate their current financial situation by reviewing investments, income sources, savings, and ongoing debts. A deep understanding of one’s current finances helps identify any shortcomings in the retirement plan. It also provides a clear picture of where one needs to be by the time one retires.
3) Make a Retirement Budget
A key step in retirement planning is to set a budget to determine future expenses. One must list the expected costs, including those associated with housing, daily living, entertainment, and travel. Do not forget to account for inflation and other unexpected expenses. This step helps create a clearer picture of how much one must save to lead one’s desired lifestyle in retirement.
4) Pick the Right Investment Options
Once the retirement goals and budget are set, it’s time to pick suitable investment options to grow one’s savings. It is important to diversify investments to balance potential risk and returns. Some popular types of investment options include:
- 401(k)
Most companies offer 401 (k) plans to their employees. A key benefit of such qualified retirement plans is that the employer can match what is invested up to a specific amount. For instance, if the employee contributes 4% of their annual income to the plan account, the employer could match said amount. They will deposit the sum, along with the employee’s share, in the retirement account. One can contribute more than the amount that will earn the employer match, including 10% or above.
- SIMPLE Individual Retirement Account (IRA)
This retirement account is available to employees of small businesses. It works like a 401(k) and allows employees to save money automatically through payroll deductions with the option of an employer match.
- Traditional Individual Retirement Accounts (IRAs)
While this investment option is similar to a 401(k) plan, one can invest online at any bank or brokerage. This IRA is for self-employed individuals and those without access to a 401(k). But any earning individual can invest in this IRA. The money saved in an IRA is deducted from one’s current taxable income, lowering one’s tax liability. But when one withdraws money during retirement, one will be subject to a standard tax rate.
- Roth Individual Retirement Account (Roth IRA)
Roth IRAs are funded with after-tax dollars. There won’t be any immediate tax breaks on one’s investments. Furthermore, the money paid into the account is taxed in that year. But, one won’t owe any taxes when they start withdrawing money, either on the deposited amount or the investment gains accrued.
Milestones of Retirement Planning by Age
1) Young Adulthood (Ages 21 to 35)
Individuals just entering adult life may not have a lot of money to invest. But, there is ample time for investments to mature. The goal of saving during this time is to accrue compound interest—the more time at hand, the higher the interest earned. If one can put aside $50 a month at age 25, it could be worth three times more than starting with the same amount at age 45.
2) Early Midlife (Ages 36 to 50)
During this stage, one may start dealing with financial responsibilities, including mortgages, insurance premiums, and student loans. But one must continue saving at this stage of retirement planning. Make use of 401(k) matching programs or Roth IRA and maximize contributions. Furthermore, one must not overlook life insurance, as it acts as a financial safety net for one’s family without relying on retirement savings if something unexpected happens.
3) Later Midlife (Age 50 to 65)
When one approaches retirement, it is advised to transition to safer investment options, such as treasury bills (T-bills). Those in this age group usually have higher incomes than younger individuals, so this is a good time to maximize retirement contributions and ensure the savings are on track for future use.