Many of us are always looking forward to retirement to relax and spend quality time with our loved ones. However, not every retiree is comfortable and happy. The truth is that retirement is a long process, and the earlier you realize it, the better.
To have a comfortable, secure, and fun retirement, you need to take time to plan it. You need to build a reliable financial cushion that will fund it from the start to the end. The retirement process typically starts with you thinking about your retirement goals and how you will achieve them.
Without proper planning, it is almost impossible to live the calm and peaceful retirement life that you always envisioned. So, what are you supposed to do to get started with your retirement planning?
Read this post to the end to discover five essential steps you need to take to start planning for your retirement.
When Can You Retire?
Before discussing the five steps to retirement planning, let us figure out when you can actually retire. Generally, it is your responsibility to figure out when you want to retire and how much you need to save to replace your current income.
One of the most important things you need to keep in mind is that the earliest you can start claiming your Social Security benefits is at the age of 62. Furthermore, by filing earlier, you stand to lose a portion of your benefits.
If you were born in 1960 or later, the federal government expects you to retire at 67. Your Social Security benefit will even increase if you can delay your retirement until 70.
But that doesn’t mean that everyone retires at 67 or 70. Some people retire much earlier because they want to and have enough savings to care for their needs. Ideally, it is best to slowly ease out of the workforce other than retiring abruptly.
5 Key Steps to Retirement Planning
As mentioned earlier, retirement planning is a process. The primary objective is to save enough money to sustain your current lifestyle even if you quit working and do whatever you like. So, what do you need to do to get there?
Below are the five critical steps to retirement planning that will help you get started.
Step 1: Understand Your Time Horizon
Your current age and expected retirement age should serve as the basis for creating a solid retirement strategy. Figure out when you want to retire and the amount of time left to achieve your financial goals.
Typically, the longer you have to plan, the better your investment portfolio can withstand a relatively higher risk.
Plan your investment strategy carefully and figure out ideas that can help you generate the money you need to realize your retirement goal.
If you are still relatively young and have 30+ years to your target retirement age, consider investing in relatively riskier but highly profitable ventures such as stocks and bonds.
Furthermore, your aim should be to generate returns that can outpace inflation to help you maintain a relatively high purchasing power during retirement.
Generally, the younger you are, the more time you have to put things together and try out riskier investments. However, if you are old and really close to your target retirement date, your portfolio should be more focused on risk-free investments and capital preservation.
Step 2: Review Your Current Financial Situation
Once you have envisioned everything about your retirement and your perfect retirement age, it is time to assess your current financial situation and figure out what you need to do.
At this point, you should be as realistic as possible to understand what you can afford in retirement and your starting line. Depending on where you are in your life and career, you can figure out the kind of planning you need to undertake to start working towards your retirement.
Some of the critical questions you need to answer at this point include:
- Do you have any debts you need to settle?
- How are you managing your current finances?
- Are you managing your expenses effectively?
- Are you saving and investing appropriately?
If you can’t answer these questions satisfactorily, consider talking to a financial advisor who will assess your current situation and advise you accordingly.
Step 3: Create a Savings Fund
This isn’t the time to splurge money on unnecessary expenses. You need to plan everything and manage your finances prudently no matter how unpredictable some circumstances may be.
Plan for everything you think may happen in your life, including unforeseen emergencies such as medical expenses. From there, commit a specific percentage of your income to a saving fund. The savings fund should always be on an upward trend.
Any income generated from side hustles or part-time jobs should be directed to your savings fund. The only time you should be withdrawing money from your retirement saving fund is when you want to invest it somewhere to gain profit.
Step 4: Choose a Retirement Plan
One of the critical cornerstones of retirement planning is determining how much money to save and where to save it.
A good starting point will be a 401(k) or any other employer-provided retirement plan if you are employed. If you are self-employed, you can open your own retirement account and start saving your money there.
The only thing you need to remember is that there is no single best retirement plan, but you can have a combination of several retirement accounts to accomplish different objectives.
Generally, a good retirement account should provide you with tax advantages and additional saving incentives such as matching contributions.
This is the primary reason why a workplace retirement plan such as 401(k) is always a good starting point. However, if you don’t have access to such a plan, you should consider IRA. With IRA, you can open your retirement account online and proceed with the savings without issues.
Some of the retirement plans worth checking out include:
- Roth IRA.
- Simple IRA.
- Traditional IRA.
- Self-directed IRA.
- SEP IRA.
Step 5: Stay on Top of Estate Planning
A good retirement plan will always take care of estate planning. Although estate planning can be quite complicated, everything becomes relatively easier when working with qualified estate planning professionals such as accountants and attorneys.
Life insurance is an important aspect of your estate planning and retirement planning process. It is critical to have both life insurance and estate plan coverage to ensure that your assets will be well distributed among your loved ones should you die prematurely.
A good estate plan also helps your loved ones to avoid the long and expensive probate process.
Summary
The burden of retirement planning is falling on Americans now than ever before. Unfortunately, only a few people can count on employer-provided defined-benefit pension. Therefore, it is upon you to start planning for your retirement as soon as possible.
One of the most challenging aspects of creating a good retirement plan is striking a balance between your expectations and reality. Focus on saving and investing while you and everything will be possible.
