Planning your retirement is a complex process that will change as time passes. However, you do want to have a comfortable and secure retirement and for this to happen, you need enough money to finance it all. This would have to include any surprise expenses, such as medical bills or similar things. So you need to carefully plan out your retirement.
You also want to have fun and this is why it makes sense to plan now so you can have a better future.
This starts with you understanding what your goals are. How long do you have to meet your goals?
Look into some retirement accounts that actually work for you and account for taxes as well. You can minimize this while you save and continue to do so until you retire.
But, everyone should know the essential five steps of planning for your retirement.
Understand the time that you have
Your age right now and your expected age when you retire is the basis of all your investment. The longer you have, the better off you’ll be and more risks you can take. If you have about 30 years until you retire, then you should invest in riskier assets like stocks. Of course, they can be volatile, but they outperform other elements like binds, especially in the long run.
Here’s an article that explains the time horizons: https://www.investopedia.com/articles/investing/110813/using-time-horizons-investing.asp
In addition, you need to outpace inflation so you still have more financial power in the future and during your retirement, and this especially relates to your purchasing power during retirement. Inflation starts in small bits but it can rise high. We all want growth for our money and inflation destroys the value of your money. Small inflation can erode the value of your savings over time.
The older you are, the more you should focus on preserving your capital and this means that you should have more securities like bonds. While they don’t return high like stocks, they are less volatile and they can be used as an excellent source of money. There’s less concern with inflation.
Separate your plan into different components and stages.
Determine your spending in retirement
You need to be realistic about what you’ll be spending in the future (read here). This will help you determine the amount of money you need to save. Most people think that they will spend way less when they retire. However, this is not the case. Especially so if you, for instance, haven’t paid your mortgage yet or you still have to pay for your kid’s college tuition. Then there’s the case of medical bills which can pile up in retirement. Of course, you have to account for the first few years when you’ll probably be traveling or splurging on other things on your bucket list.
If you want to save enough for your retirement, you should aim to save as much as you are spending at the moment. The cost of living is an increasing thing and especially so if you account for your medical expenses.
Account for the fact that people now generally live longer and spend more than they used to in their retirement. You don’t want to be forced to go back to work a few years in.
Being accurate in this aspect is crucial to your future success.
Of course, don’t think that you will spend more because that could be inaccurate as well and you will spend less money than you can, not living the lifestyle you want to live.
Account for all of the expenses you might have. For instance, if you want to buy a new home or if you want to fund your children’s or grandchildren’s education, weddings and so on. All of this needs to be accounted for.
Calculate your rate of investment returns after the tax
Once you know what you’ll spend and how long you have, you can see what your real after-tax rate of return is. It has to be calculated in order for you to be able to see how feasible your portfolio is. The older you get, the return threshold becomes lower, especially if your portfolio is low-risk.
This depends on the type of your retirement account but the returns should be fixed and the return can be calculated. It’s an important part of planning for your retirement.
See what your risk tolerance is compared to your goals
This might be the most important step in your planning. Whether you are handling the decisions on investment or a money manager is doing is, you need to allocate the portfolio in a way that balances your risk tolerance and your goals. How much risk do you want to take in order to reach your goals? Should you allocate a part of your income into a safer option for regular expenses?
You need to be comfortable with each risk that you take. And you also need to be aware of what it means for you. Know what is a necessity and what is a luxury and find a good retirement investment website that can help you with that. You should consult your advisor and your family members.
Understand that markets go through ups and downs and you can afford to have your portfolio’s values rise and fall. Don’t give in to panic and buy when markets decline.
Plan your estate
For a complete plan, you will need to plan your estate as well. Get life insurance as a part of your estate plan and your retirement plan. This ensures that what you have is distributed properly to the people you love and that they are taken care of once you’re gone. A careful plan will help avoid a long probate process.
Plan for taxes as well. If you want to leave money to your loved ones or to a charity, account of taxes whether you gift the money or you give them through an estate process.
