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How to Plan for Retirement

Not sure how to start planning for retirement? Read our guide on how to get started to ensure you’re financially ready to retire.



Retirement Planning

A financially secure retirement doesn’t just happen. Instead, it takes commitment and planning. Unfortunately, many people think it is too early to start saving for their retirement. While the best time to start saving for your retirement is now, it is never too late or early to start saving for your retirement. Research claims that only 40% of Americans know the amount they would want to save for their retirement. Another worrying finding is that a considerable percentage of workers in the private sector with access to a retirement contribution plan are yet to embrace it. Putting money aside for your life after employment is a habit you can live with. Here are steps to consider when planning for your retirement.

Diversify and invest for Growth

People are often tempted not to invest in stocks to reduce their investment risk. However, they forget that the growth that their stock investment may provide may still benefit them at a later stage in their life. A smart investor should diversify in mutual funds, bonds, stocks, and any other asset aligning with their liquidity needs, investment time horizon, and risk tolerance.

Examining your sources of income ahead of your retirement gives you room to make any changes that may be necessary. A retiree needs a well-balanced portfolio to generate enough income to cover their retirement expenses for at least three decades. You will also endure any downturns that may pop up along the way. Get in touch with Allworth Financial for guidance in making sure your portfolio aligns with your retirement plan and investment objectives. But note that diversification may not protect you against loss or guarantee a profit in declining markets.

Forecast Your Retirement Income

You can easily estimate your potential income during retirement by calculating your expected employer and social security income. The likely source of the rest of your retirement funds will come from your investment accounts, savings, wages, or any other income generated in retirement. You need to spend around 4% of your retirement portfolio annually if you want your assets to last throughout your retirement life. For example, a retiree with $1 million worth of retirement assets should expect to spend roughly $40,000 of their retirement savings for their assets to last throughout their retirement. Make the retirement you envision a reality by combining this amount with your other savings and pensions. While spending 4% of your portfolio in retirement each year may seem overly simplistic, it is a good starting point.

The rate at which a retiree can withdraw their retirement savings depends on their risk tolerance and age. By adhering to these rates, you can be certain not to exhaust your retirement wealth. But, still, you can boost your retirement funds by cutting on your discretion expenses, working longer, deferring your social security payments, and postponing your retirement. The longer you save for your retirement, the more likely your retirement funds will last.

Contribute to Retirement Accounts

Whenever possible, aim to contribute the maximum allowed in your retirement plans. By doing so, you increase your chances of qualifying for maximum pension contributions from your employer. Consider setting aside more than usual contributions as your retirement gets closer. Another trick would be consolidating retirement plans of the same type within one institution as you near retirement. With this, it will be simpler to manage your retirement investment and have a clear understanding of your total retirement assets.

It may also be necessary to review any retirement plans you may still have with former employers. Then, take time to understand how distribution choices work before changing jobs. But weigh the pros and cons of each option before making a choice. Getting advice from Allworth Financial, a financial and tax expert, may be helpful.

Consider Your Future Medical Costs

Your Medicare will likely cover a considerable amount of your routine healthcare costs if you decide to retire aged 65 or older. However, supplemental coverage may help cover your non-routine healthcare expenses that are likely to arise as you age. Also, your Medicare may not cover some of your long-term healthcare costs. So, the best way to protect your retirement funds is by investing in long-term care insurance that will cater for your home health aides. And the best time to buy an insurance cover is now because your premiums will likely be lower than a few years later. You will also reduce the likelihood of insurers rejecting you.

If you already have a health savings account, try to contribute the highest amount you can. Funds in your health savings account are tax-advantaged and can accumulate with tax-free compounding until you retire. However, note that distributions used for qualified medical expenses may be subject to penalties and income tax.

Downsize Your Debt

If you have a loan or mortgage, consider accelerating your payments so that you get to retirement with everything paid off. Also, consider cash payments for major purchases to avoid new debts. By downsizing your current debts and limiting new ones, you will have a more manageable monthly budget.

Know When to Start Planning for Your Retirement

Your retirement strategy should be informed by your expected retirement age and current age. The longer the period between your current age and expected retirement age, the higher the risk level your investments can withstand. A young person with over 30 years until retirement should consider investing in risker ventures such as stocks. While volatility may occur, stocks have proved to outperform other securities over an extended investment period. Many people aren’t sure how to start, or how much risk to take on, so they’ll often meet with a financial advisor to come up with a tailored retirement plan.

Young people should invest in assets that will outpace inflation to stand a chance to maintain their purchasing power upon retiring. Inflation starts small, but over time, it can turn into a catastrophe. It is an anti-growth compound that can erode the value of your investment. Small inflation of 2% can erode the value of your investment by up to 50% within two years. While it may not seem so significant, given time, it can have a huge impact on your retirement savings.

So, the older you get, the more you should focus on capital preservation and income generation. That could mean a higher allocation to less volatile securities such as bonds, even if their returns may not be as high as stocks. Their advantage is that they can generate a steady income to sustain you during retirement. By investing in bonds, concerns over inflation will be a thing of the past. A 50-year old who is about to retire in a few years will not have the same concerns about inflation as much as a 25-year old who has just entered the workforce.

Assess Your Risk Tolerance

A realistic retirement plan should balance between risk aversion concerns and returns objectives. It would be best if you were comfortable with the risks you take in your portfolio and distinguish between your luxuries and necessities. It is an aspect worth discussing with your family and financial planning expert before outlining your retirement plan. Don’t be an investor who succumbs to daily market noise. Instead, you have to find ways to manage your portfolio. Managing portfolios is like parenting. Those mutual funds that seem not valuable now can turn out into your best performing investment a few years later. So, don’t just give up easily. Markets will go through up and down cycles, but if you’re investing for your retirement, you should be able to see the rise and fall of your investment with those cycles.

Estate Planning

Another key step in a successful retirement plan is estate planning. Each retirement planning aspect requires expertise from accountants, lawyers, or any other professional in the field. Obtaining a life insurance policy and investing in estate planning ensures that you distribute your resources as planned and that your dependents won’t experience financial hardship upon your death. A carefully outlined estate plan will also help avoid lengthy and costly probate processes.

Another crucial part of estate planning ahead of retirement is tax planning. Where do you wish to leave your assets once you die? It would help if you considered the tax implications of passing your assets to your dependents or donating to charity. Opt for a retirement plan approach that helps generate enough returns to meet yearly inflation while preserving your investment value. It may be necessary to consult Allworth Financial to determine the best way to transfer your assets to your beneficiaries.

Estate planning tends to vary based on your life as an investor. For example, wills or power of attorney may be necessary for a young person who has just entered the job market. But as you age, trust will become a crucial component of your retirement plan. So, it would be helpful if you worked with an estate planning attorney for assistance in planning for your retirement.

Concluding Thoughts

The burden of planning for retirement seems to have shifted to individuals. Employees no longer count on the defined pension plans provided by their employers. Managing retirement has become a personal responsibility, not your employer’s, especially due to the rise of individual retirement plans such as 401(k)s. However, one obstacle often encountered when planning retirement is balancing the desired living standard and realistic return expectations. Still not sure how to plan for retirement? Just create an adjustable portfolio that you can update to reflect changes in your retirement goals and market forces.