If thinking about your retirement planning makes you nervous or puts you to sleep, you are not alone.
What does retirement planning even mean?
Retirement planning is a broad term that refers to learning about and choosing financial strategies that will enable you to be comfortable and secure in your retirement years. A good retirement plan, executed smartly, can provide you with enough money to cover all of your later-year living expenses after retirement.
Let's explore the importance of retirement planning and examine the steps you need to take to prepare for your golden years.
Why you should plan for retirement?
Good news! People on average are living longer and are able to remain healthy and active well into their sunset years.
But many individuals haven’t saved or invested enough money to retire in their 60s with the confidence that their funds will last for their lifetime. Both the Center for Retirement Research at Boston College and the Consumer Financial Protection Bureau have estimated that approximately 50% of today's retirees have cut back on their spending and will be forced to do so, due to dwindling resources.
Far too many retirees end up relying on Social Security to cover the majority of their living expenses only to find out the hard way that it isn't nearly enough. Social Security retirement income is only designed to replace about 40% of the average worker's salary, but more than one in five married couples and 45% of single retirees depend on Social Security for more than 90% of their incomes in retirement.
The bottom line is that, while many get by without ever making and executing a retirement plan, those who most enjoy their retirement do so in part due to having a retirement plan. Retirement planning is what can help you to be financially comfortable after you leave your job.
What we consider when planning your retirement.
When you want to retire? Are you planning to work until age 65 or until you are older than that? Do you have a goal of retiring early? How many more years, are you planning to spend in the workforce significantly affects how much money are you likely to need. If you choose to work until you are older, not only do your investments have more time to grow but the number of retirement years you need to fund is slightly reduced.
Where you want to live? Are you going to stay in your current home or downsize? Do you want to stay in the same area or retire somewhere warm or closer to relatives? The cost of living in the area where you'd like to live as a senior citizen is another major factor impacting how much money you will need in retirement.
How will you pay your living expenses? Your Social Security retirement income can't cover all of your expenses, so will you need to save or invest money as well? Yes, Another factor to consider is the magnitude of your living expenses themselves. Whether you own or rent property in retirement can significantly change the amount of your living expenses.
How much money you will need to retire?
You may be wondering what dollar amount will be enough money to comfortably retire. Unfortunately, there's not a one-size-fits-all number. To estimate how much money you personally need to retire, follow these basic steps:
1. Estimate your total annual living expenses in retirement. You can use the rule of thumb that the typical you retiree needs about 80% of his or her pre-retirement income to maintain the same standard of living after leaving the workforce for good.
2. Subtract your expected Social Security benefits and any pension income you expect to receive from your estimated total annual living expenses in retirement to compute your estimated net annual living expenses. Your latest Social Security statement, which you can find on the Social Security website, has an estimate of the Social Security income you are likely to receive.
3. Multiply your estimated net annual living expenses in retirement by 25 to determine a total amount of money you need to save for retirement. Multiplying your expenses in retirement by 25 to determine the total amount of retirement money you need is linked to another rule of thumb called the 4% rule. This rule advises you not to withdraw more than 4% of your retirement savings per year in order to fund your retirement for at least 30 years.
How to invest for retirement
Saving money is distinctly different from investing it. Most people save for retirement by investing money, often in the stock market. You are unlikely to meet your retirement planning goals if you simply allocate a portion of your salary to a savings account. You need to invest in assets that gain value. That's why we made the stocks IRA available.
To emphasize that the way to save for retirement is to learn how to invest, imagine that you contribute $5,000 per year to a savings account paying 1% interest annually. In 35 years, that account would be worth $208,000. But if you invested that same $5,000 annually, assuming just a 7% average annual return, the account would hold close to $700,000.
Of course, the returns your portfolio achieves depend on what you invest in it. We advocate for stock investing and stocks ira as the best way over the long term to build and retain wealth, and we also advocate for saving some money in cash when your annual or monthly returns are made on your portfolio.
We enable withdrawals on our retirement For you to be a cushion against any unexpected financial blows.
How much money do you need to invest in retirement account each month?
The monthly amount of money that you should save differs for every person. Your current age, your target retirement age, and how much retirement money you’ve already accumulated are all relevant factors. But, as a starting point, most Americans would do well to save and invest 20-30% of their incomes for retirement.
If you don’t have a side job, Then you can work on increasing the amount. Try to increase the percentage of your income you allocate to retirement investing by 2% annually until you reach your desired contribution rate. You can also boost your contribution rate whenever you get a pay raise.
How to use your home to boost your retirement income
If you own your home, are nearing retirement, and are worried about your retirement account balance, you may be able to leverage the value of your home to generate extra retirement income.
By assuming a reverse mortgage, a lender would make mortgage payments to you in exchange for the equity in your home. Reverse mortgages aren't for everyone, but they’re certainly worth exploring for homeowners who are evaluating their retirement plans.
Start your retirement planning today
Planning your retirement is important but not something to stress over, especially if you start early. The same adage that applies to planting a tree, with the best time being 20 years ago and the second-best time being now, is relevant to investing.
If you need assistance with determining your ideal asset allocation, estimating when you can retire, or planning your retirement income, you can seek advice from our Financial Planner and our other qualified professionals. The important thing is that you take retirement planning seriously and get started in earnest today.