Over the years, retirement planning hasn’t changed too much. The concept is still the same. You work in your career, save money for your future, then you retire when the time is right.
While the concept remains unchanged, today’s investors looking to save for retirement face challenges that generations past haven’t had to worry about. For starters, life expectancy is longer, meaning your retirement savings might need to last into your 90s. Additionally, bond yields are lower than they use to be, providing lower returns. Lastly, many companies have moved away from pensions. But with a proactive retirement plan, you can reach retirement without the financial worry.
Retirement Questions to Ask Yourself
So how do you retire comfortably in this changing life stage? This retirement guide can help you dive into questions that will help create a roadmap to get you from your current plan to a retirement full of possibilities!
When Should You Be Thinking About Retirement?
There is no time like the present to start thinking about retirement. You should start saving for as soon as you can. If you start saving in your 20s with a target retirement in your 60s, that gives your money 40 years to grow!
The longer you invest in your retirement, the more gains it will generate year after year. It’s an incredibly powerful wealth-building strategy known as compounding. However, if you haven’t started yet, don’t worry. You can create a plan based on your current life stage and ensure that you have a comfortable retirement cushion.
What Does Retirement Mean for Me?
Retirement is an extremely personal endeavor. When you envision your retirement what does it look like? Are you continuing to live comfortably within a modest home and your typical day to day activities – just without work? Or are you looking to travel the world and check off items on your bucket list?
There’s no right or wrong answer because every person’s desires are different. But before you can determine how much you will need for retirement, you need a clear picture of what you would like your future to look like.
How Much Will I Need for Retirement?
Typically, it is recommended that you will need 70-80% of your income to live comfortably. However, as mentioned above, if your retirement dreams are as large as the jumbo jet you want to hop on, you might need to save a little more. On the flip side, if you prefer to downsize and live modestly, you will have a smaller retirement goal.
What Will My Living Expenses Be?
No matter which route you take, one thing you will need to assess is what you will need in terms of expenses. Consider your health expenses, living expenses, monthly bills, fuel, entertainment, and leisure. You should also consider inflation, especially if you are planning for a retirement decades away.
Am I Saving Enough? If Not, How Do I Start?
After you have determined how much you will need to cover your living expenses and fun money, you can determine if you are saving enough to reach your goals. If not, investigate ways to cut expenses in your existing budget to help increase your retirement savings. There are many budgeting tools available to help.
What Are the Retirement Fundamentals You Should Know?
Making your retirement a priority now will give you peace of mind in the future. Investing in your future will make sure you are out of the workforce on your desired timeline. Once you have an idea of the type of retirement you are looking forward to, you can begin to outline a plan to make it come to fruition.
Start Your Retirement Planning as Early as Possible
Time is of the essence. The sooner you start planning for your retirement, the easier it will be. Saving in your later years can be done. However, one of the biggest advantages to wealth building for retirement is starting sooner rather than later.
Many in their early careers might not have a lot of extra income to put into retirement savings. You would be surprised, however, as to how much money just $100 per month can earn over time. Remember how above I mentioned compound interest? Let’s say that someone starts at 30 and decides to put $100 per month into a retirement account. This account has a typical 9% return on investment. In the end, this will be close to $180,000 by the time they retire – from just $100 per month alone! However, if they waited until they were 40 before they started investing, their retirement savings would only be around $67,000.
Taking advantage of compounding interest while you are young will help boost your retirement to the next level!
Diversify Your Portfolio
Don’t put all your eggs in one basket. Diversifying your portfolio means that you are allocating your capital into different investment vehicles. You should spread your retirement investment out through different assets. This way you protect yourself from major losses for a more stable return over time.
Monitor Your Investments Routinely
Avoid setting and forgetting your investments. Reviewing your investments can help provide you with a clear picture of what is working and what is not. Some investors prefer to check their investments quarterly, some yearly, some even check theirs monthly. Your portfolio is your future wealth. So it is natural to want to monitor your investments and ensure your plan is working.
But do not fall victim to emotional investing. Pulling all your funds out if there is a slight dip in the market is never a good option. News headlines can cause panic, the stock market will drop, but your retirement is likely years, or decades, away. Focus on what you can manage, and do not make rash decisions when it comes to your retirement.
Rebalance as Necessary
Self-discipline is key. If you have been monitoring your investments and feel that you need to rebalance them, be sure to do so. But make sure you are not acting based on your own fear or anxiety. Emotional investing can wreak havoc on your portfolio – causing you to sell low or jump into an already heated market.
Keep Eyes on the Prize
Remember, the stock market will fluctuate. You will see large gains and you might even see losses. Taking emotion out of your investing will help you keep your eye on the prize. If you are unsure if you are reacting to the market swings, or making a valuable rebalance, reach out to your financial advisor for guidance. They will have firsthand knowledge of your portfolio and retirement goals. Advisors can help guide you with a solution to rebalance your portfolio. Or perhaps they’ll just give you peace of mind to wait out the market instability.
Create and Employ a Retirement Budget
Create a retirement budget and improve your peace of mind throughout your golden years. Your retirement budget should consider your recurring expenses – monthly, quarterly, and yearly, your healthcare costs, fun-money, and any other financial obligations you have.
Once you have created your ideal retirement budget, you can begin saving an appropriate amount to reach your goals. And once you have made it to retirement, you will already have all the budgeting work done ahead of time. You will know exactly how much was allocated for your needs, helping fend of temptation to spend a large chunk of your nest egg on frivolous purchases.
Do Not Withdraw Early!
You’ve gone through all the hard work to build your future retirement, so don’t waste it! While you have contributed, invested, and focused on your retirement, it might be tempting to utilize some of your funds and withdraw them early. After all, it is your money. But be aware, if you haven’t reached 59 ½ yet, you could end up paying a 10% penalty on the withdrawal!
By withdrawing early you could lose much needed compound interest, see an increase in money owed to income tax, but most of all, you are sabotaging your retirement. Unfortunately, in 2021 there are still far too many people who are not prepared for retirement. Pulling your funds out early could cause you to not reach the finish line.
What Sources of Retirement Income Are There?
When saving for retirement there are various options that you can utilize to invest your money in. You do not have to invest in just one. In fact, most people choose to diversify and utilize a combination of these sources of retirement to help reach their ultimate retirement dreams.
Many employers offer a 401(k) plan. This qualified retirement plan is eligible for special tax benefits. It is the most popular employer-sponsored retirement plan that millions of Americans depend on.
When you invest, a portion of your salary is automatically allocated to your retirement plan. Your employer may even match your contribution, up to a certain percentage. The maximum salary an employee can invest annually in a 401(k) plan in 2021 is $19,500, with employees aged 50 and above being allotted an additional $6,500 for catch-up contributions.
If you are an employee of the public school system or other tax-exempt organizations, you may be offered a 403(b) plan. Think of this retirement vehicle as the cousin to the 401(k) plan. They both are tax-advantaged ways to help you save for your retirement, but this plan has limited investment choices.
Traditional & Roth IRAs
An individual retirement account (IRA) can help save for retirement – and potentially help save on taxes. A Roth IRA allows investors to contribute after-tax dollars, growing money tax-free. After age 59 ½, you can typically make penalty- and tax-free withdrawals.
With a traditional IRA you can contribute after- or pre-tax dollars. When you are ready for retirement, after the age 59 ½ you can withdraw your money which is then taxed as current income.
Another type of retirement account is a Simplified Employee Pension IRA (SEP IRA). This is utilized by small-business owners and self-employed people to plan for their retirement. Similar to a traditional IRA, SEP IRAs contributions are tax-deductible, and your retirement investment grows tax-deferred until it is distributed.
Savings Incentive Match Plan for Employees IRA (SIMPLE IRA) is a tax-deferred retirement savings plan that employers can utilize to make a non-elective contribution of 2% of their employee’s salary, or a dollar-for-dollar contribution match up to 3% of the employee’s salary.
The maximum yearly contribution is $13,500 in 2021, and employees aged 40 and above can add additional catch-up contributions of $3,000.
Brokerage Accounts & Investments
If you are ready to invest in your retirement outside of the various IRA options, many investors choose to open a brokerage account to buy and sell securities. Think of your brokerage account as a bank account, where you can transfer money into and out of it, but unlike your bank it provides you with access to investments and the stock market.
When you purchase a stock, you are purchasing a share in the company – or a small piece of that company. When the value of the company rises, the company stock increases as well. Therefore, you return a profit!
When companies are looking to finance projects or their operation, they sometimes will utilize securities called bonds instead of traditional loans. An investor provides the company with the capital, and in return receives interest. Their capital is returned upon the maturity date of the bond.
A certificate of deposit (CD) is a product that banks and credit unions offer. They provide an interest rate premium in exchange for the investor leaving the lump-sum deposit untouched for a set period of time.
CDs are considered a conservative investment compared to stocks and bonds, with a lower growth opportunity. However, they have a guaranteed rate of return.
Cash equivalents are short-term securities that are highly liquid and have a high credit quality. They are low risk, and like CDs have a low return. Cash equivalents include low-risk securities like CDs, bankers’ acceptances, government Treasury bills, corporate commercial paper, and more.
Mutual & Index Funds
Mutual funds are comprised of stocks and bonds. Some are only stocks, some only bonds, some are a combination of both. Mutual funds invest your money in multiple companies, along with other investors.
An index fund is a type of mutual fund, but it mirrors benchmark indexes like the S&P 500. It provides investors the opportunity to invest in a diverse range of companies across every industry.
While pension plans are becoming scarce, there are still a few industries that utilize them for worker’s retirement benefits. This is particularly true within government jobs. Before the 1980’s pensions were the most popular retirement plan, but how the times have changed. Now, only 17% of private-sector workers have pension plans as an option for retirement savings.
With a pension plan, the employer makes contributions to a variety of funds that are set aside for the worker’s future retirement. The funds are invested on behalf of the employee, and the earnings generate income when the worker retires.
Social security is a government run program that provides income for retirees. Throughout the course of your career, you pay taxes into Social Security. Your money is currently used to pay benefits for people that have already retired, are disabled, or are dependents of workers who have died.
When you retire, you can begin drawing Social Security. The amount of money you receive is calculated based on the highest 35-years of earnings you made over your lifetime. However, it’s important to remember that the money you are paying into your Social Security now is not being held for you personally. It is currently being used to pay for current benefits.
You should not count on Social Security to be your main source of income in retirement. It has an unclear future outlook. While it will likely still exist, a smaller payment may be received than what is currently being paid out in 2021.
A contract between a financial or insurance company and an individual is called an annuity. Within this contract, you will pay a specified amount of money now (or on a recurring basis). In return you will receive a stream of income (or lump sum) at a predetermined time in the future. Annuities are typically used by retirees to provide an income stream for the rest of their lifetime.
Outside of IRA and securities investing, some savvy investors choose to put their money into real estate. Rental properties, while not the easiest form of investing, can be a great way to collect more income for retirement. Finding the right property for the right price at the right time can help set you up with a wonderful investment property.
But be aware, rental properties come with recurring expenses. Even if you do not take out a mortgage on the property, you still have maintenance, insurance, taxes, and repair costs to consider.
Inheriting a lump sum of money from a family member can be a blessing. While this financial windfall can create a lot of opportunities, you should consider investing a portion of your inheritance in your future.
Not everyone may receive an inheritance when a loved one passes away. If you are lucky enough to receive an inheritance, you should think carefully about what to do with the money. Investing your inheritance into mutual funds, retirement accounts, or even real estate can help set you on the path to financial freedom during retirement.
An asset that is considered “liquid” is one that can easily be converted to cash quickly. The most common liquid assets include cash, savings and checking accounts. Other options include treasury bills and bonds, stocks, bonds, and certain investment funds.
Liquid assets are a vital part to your retirement. They are able to be quickly turned into cash without the possibility of losing value. To retire comfortably, you want to ensure your assets are liquid, and not illiquid. No one wants to be waiting around for their home and antiques to sell when they could have cash on hand quickly.
Reverse mortgages provide homeowners older than 62 the option to pull equity from their homes while they continue to live in them. It provides homeowners with cash to utilize as living expenses, pay off debt, or use for their personal needs. But there is a catch. The homeowner, or their heirs, will need to pay back the loan when the home is sold or if they pass.
Home Equity Loan
Tapping into a home equity line of credit during, or just before, retirement can be a valuable tool. That is, if it is done correctly. When you are looking to retire, it makes sense to use lower-priced credit options. Such options include home equity loans, to pay off higher-priced debts. You can also use the home equity loan to make renovations for home features that are needed as you age.
Part Time Employment
Whether you just want to be out of the house, be active, or need the money, finding a part time job can help your retirement. There are a plethora of jobs specifically for retirees to help keep you active and your mind sharp. As an added bonus, you’re able to add a little more cushion to your bank account. Also, part time employment can help by offering health insurance, which is typically a major cost in retirement.
After taking time off to enjoy retirement, some retirees miss the business and want to come back, but in a smaller capacity. Becoming a consultant allows you to take your time to find business opportunities that appeal to you. At the same time, you’re able to help the younger generations with the knowledge you acquired as you forged the path ahead of them. You can work fewer hours than before retirement. All the while, still being of value to a company and making a little extra income on the side. Talk about a win-win-win!
Utilize the power of interest to help improve your retirement savings. Stocks, bonds, CDs, 401(k)s, and other investment vehicles all provide returns in interest that can help improve your wealth and get your retirement on track.
Road to Retirement With a Financial Advisor
Creating a retirement plan does not have to be daunting. When you start planning for your retirement, there are people who can help you. Certain people can assist you so that you are not creating a plan on your own. A trusted financial advisor in your area can help create a unique retirement plan for you. They will help you hit your goals and provide you with a peaceful financial retirement.