Retirement Planning: How to Prepare to Retire

Retirement planning is a strategic financial step for anyone who wishes to retire well.

What is retirement? Retirement is leaving an occupation, workforce, or active working life. We often associate retiring with age, but there’s no US federal mandate to stop working. Instead, the US government sets the national minimum age to receive government benefits such as Social Security and Medicare.

Now imagine planning your finances not to be solely dependent on federal benefits. 

In this article, you’ll learn about retirement planning to ensure you set goals that give you an ultimate choice on when to retire or not.

What is Retirement Planning?

Retirement planning is about preparing yourself financially after paid work ends. Early in your career, you may focus on salary and contributions into retirement accounts. During the middle of your career, it may be about the accumulation of assets and income goals. And as you approach the traditional retirement age, it’s how you effectively spend your portfolio.

Retirement planning can start anytime but best to do so early even though your wants and needs evolve through time. Starting sooner can set you up for a comfortable retirement later in life or may even lead to the financial ability to retire early.

How to Save for Retirement

First, I want you to understand that saving money for retirement requires investing that money into the stock market or other income-producing assets. There are seven different types of income streams. As part of retirement planning, you should also work to diversify your sources of income for more independence and security.

Secondly, it’s essential to have a vision of the life you’d live in retirement. Where do you see yourself residing? How will you be spending your time? Answering these questions can help you understand the expenses you’ll need to cover with your retirement income.

Lastly, understand your retirement is a financial number, not an age. It’s a matter of balancing income with expenses. You can retire when your income (from passive streams) can cover your lifestyle expenses. You can invest for financial independence.

Retirement Planning Goals

Retirement is often associated with old age and is considered a life milestone—however, not many plans for the inevitable, whether desired or needed. Through retirement planning, you start a journey that includes setting financial goals such as income, investments and assessing risks and timelines.

Additionally, many people depend on Social Security benefits, but you’ll need to be at least 62 years old. The sooner you start claiming SSA benefits, the lower the benefit amount. So, planning for your retirement includes a more thoughtful approach.

When you think about the life you want to live in retirement, it’s essential to plan and act to make that vision a reality. Consult with a financial advisor to determine your complete options.

Steps to Retirement Planning

When can you retire? Retiring comes down to when you want to stop working and when you’ll have enough income from savings or investments to enable you to stop working for a paycheck. Some people choose to retire early, and others decide to work for as long as they can. Most often, it’s a matter of wanting or having to work.

Step 1: Know when to start

Start planning for retirement as soon as you can. If you’re in your twenties, then that’s a good time to start. The sooner you start contributing to your retirement, the more time your money has to grow through compound interest. Now, if you’re past your twenties, it’s not too late to start, but you’ll need more catchup contributions to ensure you meet your financial targets.

When you start saving and how many more years until retirement age can significantly impact the amount of money you’ll have at retirement. Fidelity suggests knowing your savings factor to determine how much salary should be saved at different ages.

“For example, by age 35, Fidelity suggests that you should have saved 1X your current salary, then 3X by 45, and 5X by 55. “Setting up clear goals linked to your salary can help simplify your planning and help you determine if you are on track throughout your working life,” says Fidelity Executive Vice President John Sweeney. “Having such guideposts is particularly important in today’s workplace, where layoffs, job switching, longer life expectancy, and escalating health care costs can complicate your efforts to save for retirement.”

Step 2: Calculate how much money is needed

How much you need in retirement depends on your lifestyle choices and expenses. With lower lifestyle expenses, you’ll need a lower amount for retirement too.

Many financial advisors offer investment advice stating most people need at least $1 million to retire comfortably.

So, how much money do you need to retire? Consider the rule of 25, which states you’re ready to retire when you have 25 times your planned annual spending. For example, your annual expenses/spending is $60,000, then you’ll need $1,500,000 ($60,000×25) saved.

It may seem impossible to achieve that financial goal, but if you start earlier, invest, and use the power of time, it may be more doable. 

Step 3: Prioritizing financial goals

Chances are you have other financial goals, such as buying a house or paying off debt. It’s vital to prioritize retirement savings as you work towards your other financial goals. Remember, time magnifies your contributions, and don’t wait until you’ve achieved other financial goals before starting retirement.

To achieve your retirement goals, you need to start saving as early as possible to take advantage of compound interest’s time and power. It’s also essential to keep your lifestyle expenses low without depriving yourself of comfort and enjoyment. 

Step 4: Choose retirement accounts

The best thing to do is to make sure you are maximizing your 401(k) contributions. A good plan is to contribute 10% of your pay into a 401k. If you’ve maximized your 401k contribution, then you can save more through a Roth IRA. Remember, the amount you need to save each paycheck depends on the cost of your retirement. Keep your living expenses low and save as much as you can. Learn more on how to invest for retirement.

Find the best retirement accounts in the marketplace.

Step 5: Choose your investments

With retirement accounts, you have investment options that include stocks, mutual funds, and bonds. For most workplace retirement plans, employees are offered target-date funds within the 401(k) plan. These funds use an investment allocation based on your projected year of retirement. For example, a 2050 target date fund means you have about 30 years left to retire, so you’ll find your contributions into the 401(k) is aggressive and mostly in stocks.

How to Save for Retirement

The following are retirement savings steps to consider:

1. Have an emergency fund.

Make sure you have 1-2 years of savings in cash to cover your expenses. Sure, many experts recommend three months, but in retirement, you’ll need to plan for the possibility of market volatility. Having a cash cushion will give you peace of mind and ride out any market dips that impact income from stock investments. 

2. Use high yield savings accounts and certificates of deposits (CDs).

Grow your savings by earning more interest. You don’t have to keep your emergency fund in a low-interest savings account. Learn more about the emergency fund strategy and CD ladder strategy

3. Contribute to 401(k) or similar retirement plans and Roth IRAs. 

At the same time you’re building up your emergency fund, make sure you’re contributing to retirement accounts. Through a 401-k, you’ll have investment options to choose from that includes target-date funds.

For company-sponsored plans, contribute at least the minimum amount to get the employer match but aim for 10% or more of your gross income.

Retirement accounts have tax advantages that include lowering your taxable income today or tax-free investments in the future. Learn more about 401(k) basics and get a free analysis of your 401(k) investments with Blooom.

4. Investing using Roth IRAs

In addition to contributing to an employer-sponsored plan, use another tax-advantaged account known as IRAs. Roth IRA’s, for instance, are after-tax contributions that grow tax-free. When you reach 59.5 years old and start withdrawing the funds from the account, there are no taxes. There are contribution limits and minimum distributions requirements. Learn more about IRAs and find the best IRA brokerage services.

5. Invest in the stock market

In addition to investing your money using retirement plans and IRA accounts, you can invest additional money in the stock market directly. These investments don’t have tax advantages so consider doing this after maxing your contributions in retirement accounts. Investing includes buying stocks, mutual funds, index funds and exchange-traded funds (ETFs), bonds, REITs, and more. When assessing what stocks or funds to buy, do your homework and consider if these are growth or dividend-paying companies. Learn how to start investing.

6. Use additional company perks to help grow your assets.

Learn as much as you can about all the company benefits. Taking advantage of tuition reimbursement can help you get a degree that could lead to a higher salary. Or using stock purchase programs, stock options, or restricted stock units can be sizeable additions to your portfolio. Read more on company benefits and perks.

7. Invest in real estate.

Your primary home is not an investment. It’s your residence and can’t be liquidated for cash unless you have another place to live. When investing in rental properties, think of them as assets that generate a positive cash flow.

8. Diversify your income streams.

Increase your income to fund emergency funds, pay off debt, and buy investments. If you’re wondering where you’ll get the money to save for retirement, consider taking on a part-time job or get yourself a side hustle. Many apps connect you to people who might need to borrow your stuff (extra bedroom, car) or need your expertise (designing) or help to complete tasks such as putting Ikea furniture together. Read 50 active income ideas.

What Impacts Retirement Planning?

Lifestyle inflation is an enemy to retirement. As you earn more money, your spending increases at the same rate. Be aware of your spending habits and inclination that can derail your retirement goals. And understand the lifestyle you’re living today may not be the lifestyle you want to live in retirement. This disconnect often causes us to spend more to feel better about our life versus the life we want to live. Learn more about creating a vision for your life.

When planning your retirement income, calculate the income produced by your investment nest egg in addition to social security benefits.

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