Retirement planning can seem like a fairly daunting task if you’ve never done it before, and it can be even more intimidating if you haven’t started at all.
But the earlier you start and the more diligent you are with your approach, the better your retirement plan will be when the time comes to actually retire and no longer earn an income from your job or business.
Here are five steps to take in order to build a solid retirement plan that will serve you well during your golden years and beyond.
Retirement planning: Why should you do it?
One of the most important decisions you’ll make in your life is whether or not to start saving for retirement.
As retirement plans become more complex, more rules, regulations, and fine print are associated with them.
To help you navigate all that paperwork and jargon, we’ve put together a list of five things you should do before diving into retirement planning.
That way, you can have a smooth transition from work-life to life after work.
It’s never too early (or too late) to start preparing for your future—no matter what age you are!
Read on to learn how to get started on building a strong retirement plan.
1) Track your income and expenses
The first step in building your retirement plan is to accurately record your income and expenses.
Depending on where you’re at in life, these numbers may vary greatly from month-to-month or year-to-year.
It’s important that you have records for everything so that you can see how much money you make and how much money goes out.
You need all of these numbers before you can determine if your retirement plan is adequate.
Retirement planning is something that everyone should do, regardless of age or financial situation.
However, each person has different goals and requirements based on their age and current financial situation.
2) Know when you will retire
Before you can build a retirement plan, you need to know when you’ll be retiring.
You may have different goals and expectations depending on your age and marital status, but it’s important to figure out where you stand and what your future will look like.
It’s best not to leave your retirement date up in the air; think about how much money you’ll need during retirement, and make sure that’s something you’re going to have available when it comes time for retirement.
For most people, that means saving as much as possible now, while they’re still working.
Also, think about how much money is enough—and be honest with yourself here!
It could be tempting (and easy) to underestimate how much income your savings will generate during retirement, but don’t go with that temptation!
Having an idea of when you’ll retire is essential for your retirement plan, but it’s only part of what you need.
3) Save the right amount
Before you even think about retirement, you need to ensure that you’re saving enough for retirement.
That means paying off debts and staying under your budget.
Once your finances are in order, take some time to identify your goals and create a retirement plan.
It’s important that you don’t just guess how much money is enough; be as precise as possible, so there aren’t any surprises down the road.
You can use an online calculator like this one or speak with a financial advisor for assistance.
4) Determine retirement spending needs
Make sure you’re spending less than you earn.
The bulk of retirement spending will go toward income, so if you want your nest egg to last through your golden years, it’s critical that you save up enough money now to match what you expect to spend later.
You can do that with an online retirement calculator.
Using one is easy — simply put in how much income you need and how long you expect it to last, and it’ll give you a projection on how much savings (and investment) are required.
When determining retirement spending needs, err on the side of being overly conservative; don’t assume returns will be higher than they are or think inflation won’t go up in 20 years as it has every year for over 40 years now.
The more conservative you are with your estimates, the less you’ll need to save up and invest.
Estimate high if possible; it’s better to have extra savings at retirement than run out in 20 years.
It’s also important that you determine your spending needs basing on an actual number, such as 30 percent of your pre-retirement income.
In other words, don’t just estimate that you need 50% of what you make now—add in all of your post-retirement expenses, including travel, insurance, and health care costs.
This will help ensure that you truly have enough saved up for later on in life.
5) Don’t forget about taxes when planning retirement
It’s easy to forget about taxes when it comes to saving for retirement.
But, because these funds are taxed differently depending on how they’re invested and when they’re withdrawn, saving for retirement is one area where paying attention to taxes makes sense.
For example, investments in traditional IRAs are tax-deferred; that means you don’t pay taxes on gains until you start withdrawing them after age 59½.
In other words, if you invest $100 today and it grows at an average annual rate of 7%, you won’t have paid any taxes until you withdraw $107 from your account—but those additional $7 in gains will be taxed as ordinary income.
How much do I need to save for retirement?
That’s an important question, and it’s one you should definitely start thinking about as early as possible.
You won’t want to hit retirement with money on your mind; but, unfortunately, we tend to think about that stuff too late—and then regret that we didn’t do something sooner.
One rule of thumb is to save 15% of your gross annual earnings.
In a perfect world, savings would begin in your 20s and last throughout your working years.
Start your retirement planning today!
Retirement planning is something that we all need to do, regardless of how old or young we are.
The earlier you start saving and building up your retirement fund, the better off you’ll be in your senior years.
To start thinking about your retirement now, consider this.
You may want to get advice from a financial professional; or not.
Either way, it’s good to know what types of investment accounts are available so you can begin thinking about what kind of retirement life you’d like to have (and how much money will be required).
Determine if your employer offers any type of retirement plan for its employees—it may already be automatically deducted from your paycheck every month.
If so, lucky you!
If your employer doesn’t offer any kind of retirement savings plan, you may want to look into opening an individual retirement account (IRA).
An IRA offers significant tax advantages and is available for anyone with taxable income.
You can contribute up to $5,500 annually if you’re under 50 years old; and $6,500 annually if you’re 50 or older.
Your money is placed in stocks, bonds, or other investment vehicles based on your chosen strategy for growth.
Starting early is key to your retirement planning success.