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How To Plan For Retirement

How to Plan for Retirement?

For some “retirement” may be a dreaded word; for others a welcome relief. Your approach towards your life and financial goals will help decide your attitude towards your golden years. For me, I am just getting started with understanding the basics and making an effort to think forward about the future instead of just living in the present.

Planning for retirement means arming yourself with plenty of information regarding inflation rates, acceptable level of yields and retirement plans. This can be particularly tough for those who do not possess a financial background. This article will sum up some of the main factors that need to be considered when planning for retirement.

Step 1: Calculate How Much You Need

Of course, the first step is to calculate the amount that you will need by the time you retire. This amount has to be sufficient to meet your expenses for around 20 to 40 years, depending on the age you retire and your life expectancy. As a precautionary measure, always overestimate your expected age, so that there are no surprises at the end of the tunnel. Secondly, your postretirement lifestyle has to be accounted for and is one of the few crucial determinants of how varied the final amount needs to be. Some people also prefer migrating to different parts of the world, and the cost of living of the country needs to be factored into the mix as well.

Another aspect that needs to be featured into the mix is medical bills. No matter how healthy an individual is, its deterioration is expected. Apportion some money to purchase a lifetime medical insurance plan. Also, account for the probability that you may be forced to retire earlier than planned as a result of market changes and the conflict between supply and demand of skills.

Step 2: Revamp Your Lifestyle

The next step towards acknowledging the inevitable retirement is to revamp your lifestyle so that saving occurs by default. The smartest step any person can take is to trash their credit cards, for it is the costliest debt one can incur; with APR rates touching almost 20%. Since it does not involve cash outlay, individuals fail to realize the impact of impulse spending. In order to limit or completely eliminate consumer debt, it is best to use cash for as many purchases as possible. The United States is one of the few countries where consumers purchase trivial things such as potatoes, on credit! Developing countries on the other hand, spend thousands of dollars in cold hard cash to purchase cars etc., and this lack of dependence on credit, is one of the reasons why they were not as severely impacted by the Global Recession.

Another clever move is to set up a direct deposit so that a certain chunk of your salary (10-15%) is regularly credited into a savings account or investment fund. This requires careful planning, and while 10 to 15% is the minimum recommended amount, some individuals can certainly afford to go higher. In order for this to happen, expenses and goals need to be prioritized. Reassess some expenditure; for example is it really necessary to have that coffee and muffin daily? Small things add up, and it is probably more feasible to invest in a coffee maker than to splurge at Starbucks on a daily basis. Maximizing the mileage out of every dollar spent is the key to sufficient retirement savings.

Step 3: Learn More about Retirement Funds

Familiarize yourself with retirement funds. There are many with features as diverse as night and day, and may fit your financial needs as though they were tailor-made for you. Below are the few types of retirement funds that you will definitely encounter in your endeavour to find the right fund:

Government sponsored funds: These are typically supported by tax benefits to encourage individuals to invest in them. The biggest government sponsored pension fund is the Social Security in the United States.

Traditional IRA: IRA stands for Individual Retirement Account and contributions are usually tax deductible. However, taxes are levied at the time of withdrawal, which must begin when the individual reaches 70 and half years of age. The accumulated funds are invested in securities as specified by the custodian financial institution.

Roth IRA: This type of fund is similar to the Traditional IRA, however has one major difference: timing of taxation. In Roth IRAs, taxes are deducted prior to contribution to the fund and post-retirement withdrawals are tax free.

SEP IRA: Stands for Simplified Employee Pension IRA, it is the single most popular fund used by self employed individuals and small business owners. The business can also contribute on behalf of their employees, and taxes are deferred till the time of withdrawal.

401(k) Plans: 401(k) Plans are designed for corporate employees, who contribute a portion of their salary to this fund. These contributions are tax deductible, and funds can grow tax-free. Withdrawals are taxed which can begin by the time the contributor is 59 and a half years of age. Some companies also contribute to these funds on behalf of their employees.

A Word of Caution

There is no certainty that individuals will not be forced to retire earlier than they intended. There is no certainty that their retirement fund will be sufficient to support their standard of living and there is no certainty that retirement funds will hit the expected rates of return. With so much uncertainty, it is essential for every individual to prepare for the worst.

Many retirees opt for part time jobs to supplement their income. With technological advancement, quite a few jobs have become “online”, reducing and sometimes even eliminating the need for workers and contractors to be present onsite. Freelancing as it is known is one of the most popular means of earning for senior citizens, since they can work from the comfort of their home with flexible hours. However, success in this field is defined by the expertise of the individual and hence it necessitates honing of skills in accordance with market trends, in order to ease their transition into the freelancing world, post-retirement. Freelancing jobs can range from running a consultancy, to writing, designing, programming and everything in between. For more information click  https://investor.vanguard.com/retirement/planning/

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Retirement Planning 101

Introduction

Retirement planning can entail a number of things, but in general context refers to achieving financial stability and independence in one’s post retirement years, when there is no steady stream of income to bank on.

Retirement planning is an extensive process whereby individuals need to assess several aspects of their current and future life. Many young individuals are under the false impression that they can begin saving for their retirement at a stage when their earnings are growing and have steadied their feet on the corporate ladder, commonly in their mid 30s. This unfortunate attitude heavily contributes to insufficient nest eggs of retirees.

A rising life expectancy and poor job market that is a result of rapidly changing requirement of skills, has translated into forced early retirement and mounting medical bills for seniors. With citizens left at the mercy of insurance companies, it would be an understatement to say every dollar is capable of prolonging your lifespan.

Retirement planning is not just a method of saving and investing money; rather it requires a complete lifestyle overhaul, so much so that it can be used synonymously with “lifestyle planning” since it requires making significant changes in your lifestyle in order to save for retirement.

How Much Do You Need?

Actually, there is no arbitrary amount. Your nest egg can differ significantly from your neighbor and co-worker. A few major factors that can heavily influence the grand total are summarized below:

Retirement Age: This is a double edged sword. The earlier the retirement age, the higher the amount of nest egg required, but it also shortens the timeframe to accomplish the goal.  The post-retirement period can easily range between 10 to 35 years.

Medical History and Insurance Coverage: Old age comes hand in hand medical bills. While we all wish to be in the best of health till our last moment, the carriage turns into a pumpkin the minute the clock strikes 12. Medical advancement has not only added years to age, but our expenses as well. And more often than not, we have heard of insurance companies denying coverage citing this clause or the other. Therefore, since state sponsored medical insurance doesn’t kick in by the time you’re 65, it may be necessary to plan for medical expenses incurred before that age, as well as creating an expense pool for emergency purposes.

Standard of Living/Region: The least any individual would wish for, would be to maintain his/her existing standard of living. Without factoring in the effects of inflation at this stage, it is estimated that retirees need at least 80% of their maximum annual income, per year of retirement. The region one plans to retire in plays a considerable role in determining whether your retirement total is merely adequate or a princely sum.

Post Retirement Goals: Some people fancy travelling around the world, others would like to finance the education of their offspring. These need to be accounted for in your retirement fund, preferably from your first pay check.

Once these essentials are covered, you should be able to calculate the sum you need by the time you retire. Do not forget to factor the effect of inflation: it erodes the value of money. This figure will then help you to decide the average amount of your monthly savings. So, how should you invest your savings? That depends on your age.

Allocating Your Retirement Fund

Since the significance of a nest egg has been clearly established, we will now examine investment strategies for individuals at different junctures of their life.

Individuals in their 20s and 30s are at their financial prime. Not only can they afford to be aggressive with their retirement portfolios, but time is also on their side due to the power of interest rate compounding. It is recommended for young professionals to opt to invest heavily in equity (around 70-80%); preferably in those securities that are classified as growth stocks and currently undervalued. If securities experience depreciation, there is a good probability that the individual will be able to recover this amount in time for retirement. Similarly, even if funds are invested in risk free assets (20-30% in bonds and cash equivalents), the time horizon and thus growth potential is much greater than for older investors.

For those entering their 40s, the new goal is capital preservation. Individuals need to actively concentrate on their portfolio allocation since the focus must shift to dividend paying stocks and safer bonds as opposed to seeking growth in relatively risky securities. Your investment needs to be divided 50-50 or 60-40 in favor of debt securities, and the performance of the financial market needs to be closely monitored in order to mitigate risk associated with unpopular securities.

Once you start approaching your golden years at 50 or 60 years of age, it is best to limit exposure to risky securities and reduce the ratio of equity to debt instruments to around 20% to blue chip, dividend paying equity, while the other 80% to safe bonds and other cash equivalents like T-Bills.

Despite the amount of stress placed on retirement planning, it is unfortunate that many people do not attribute enough weight to this decision. Retirement is as certain death and taxes, and due to the economy, many are being forced to retire much earlier than they anticipated, ending up with considerably less savings than they originally intended to. As a result, many retirees have had to take up part-time jobs to supplement their nest egg.

Saving for retirement does not need to be a painful affair for there are many retirement plans out there that cater to very diverse needs of individuals. From company sponsored to those supported by the government; each plan comes along with its pros and cons, which individuals need to weigh in order to choose what suits their criteria and lifestyle the best. Like exercise, starting early is essential, however it is better late than never to start saving for your retirement!

For more information click https://www.fidelity.com/retirement-guidance/overview