Retirement planning involves taking steps to assure your financial security once you reach retirement age. Taking the time and effort to learn how to create a solid retirement plan is well worth it, and it can be done easier than you might expect.
Saving for Retirement
It all starts with saving. Building a nest egg for retirement begins with setting aside a portion of your income which you can later tap when needed. Though most of us are already saving what’s left of our income after we’ve paid all necessary living expenses, prioritizing savings when we make our budgets can significantly impact the amount that goes into our retirement funds.
Unfortunately, two out of three Americans are not saving enough for retirement. This important fact is what leads many to face a more difficult future when they retire. You will need to be more active in preparing for retirement.
Retirement plans such as 401(k)s and IRAs allow you to save even more for retirement. These can be generally grouped into two: defined contribution plans or company plans, and Individual Retirement Accounts or IRAs.
Defined contribution plans are ways offered by employers to help you save more for retirement. To briefly explain, you make contributions to the plan through automatic deductions from your salary. Though this decreases your paycheck, the tax benefits and investment opportunities this provides help greatly towards your retirement funds. Moreover, some employers add matching contributions – essentially free money.
IRAs, on the other hand, are retirement savings accounts that feature big tax breaks. You can skip taxes on either the money you place inside IRAs or the money you withdraw during retirement, which allows your money to compound better. They differ from defined contribution plans in that you typically open IRAs on your own, versus being offered by your employer.
Pensions and Benefit Plans
Some employers may also offer defined benefit plans – retirement accounts that’s fully managed and prepared by the employer. These plans promise a specific payout amount when you retire, calculated from your salary and years of work within the company. Once you retire, you can choose to receive a lump sum amount or monthly annuity payments.
Unlike 401(k)s and IRAs, defined benefit plans require no contribution or action from your part, and you can automatically be enrolled just by showing up for work. In some cases though, employers may require a minimum number of years working for the company before you become fully vested.
There are two general kinds of defined benefit plans: pensions and cash balance plans. Because these plans are more costly than defined contribution plans, companies have heavily reduced these benefits or even removed them altogether. This means you can’t really rely on pensions during retirement, but consider them a very nice bonus for being loyal to your employer.
Investing your savings and assets often becomes the key to having sufficient financial security in retirement. Investing allows you to make your money earn more money through stocks, bonds, mutual funds, and similar investments. It’s important to note that you can usually utilize funds inside your IRAs to finance these investment options.
Your retirement savings, accounts and investments make up your retirement portfolio. Once you reach a sizable amount, consider allocating portions into investments to harness the power of compounding, in which the interest on the amount you invested also gains interest over time. This compounded rate of growth makes investing a really powerful tool, especially if you start as early as possible.
Insurance is simply pre-need protection. Some are essential, such as home insurance and car insurance, so that if anything untoward happens to your assets, the financial impact can be lessened. Another is health insurance, because even though you’re healthy today, there’s no telling when you might get sick or suffer an accident. With medical care being so expensive today, having insurance allows you to more easily get the treatments you need.
Being insured is an integral part of any retirement plan, as it allows you to be prepared for eventualities instead of reacting only once something happens. Aside from those mentioned above, also consider life insurance and long term care insurance.
Life insurance is recommended for those with dependents, so that when you can no longer provide for them, your child, spouse or other relative will receive financial help. Long term care insurance also relieves financial burden in cases where you become incapacitated or chronically ill, as it can pay for long term care expenses such as treatments, caregiving, and even nursing home stays.
One of the biggest questions in retirement planning is: How much do I need to retire? Simply put, the answer is: a lot. Experts answer this by providing a target multiple of your final year’s salary, and these usually range between 10 to 20 times your annual income in order to comfortably retire at age 65. Those who have other sources of income, such as pensions and annuities, may need less, but make no mistake, saving enough to reach that target number requires proactive effort on your part.
Of course, aside from all of the financial planning involved, you also need to decide what to do once you finally retire. Retirees without clear plans on what to do after retiring are more common than you think. The problem then becomes what to do with all that time you suddenly have.
It’s recommended to set new goals for yourself once you retire. Start new hobbies, learn new crafts, or even start a new career. Finding purpose in retirement is just as important as being ready for it.
Check these additional recommended readings:
Retirement Planning Basics, Investopedia
Saving for Retirement: What Do You Know?, National Institute on Aging
Taking the Mystery Out of Retirement Planning, Department of Labor