Over 10,000 Americans turn 60 daily, which makes retirement planning important for millions of people each year. When it’s the moment for you to retire, you cannot afford to be unprepared. However, according to statistics, less than 40% of Australians over the age of 40 are prepared for retirement. Having a precise strategy on how you want to spend your post-retirement period and how you will pay for it is essential to ensure that you can retire securely and comfortably. If you will retire in decades to come or you only have a few years to get ready, there are various things you will want to add to your financial planning to-do list. In this article, we will cover financial planning for retirement in 5 easy steps.
If you have followed the strategies outlined in financial tips for young adults and building wealth in your 30s, 40s and 50s, you will be more financially fit than many. If not, that’s ok! Read on to discover some tips for improving your finances for retirement.
1. Begin with your target retirement amount
When planning your financial strategy for the post-retirement period, you should start by figuring out how much money you will require to save for retirement. You can then build your financial strategy around the method that can get you to achieve that number. When estimating your target amount, you should consider various factors, including:
- What your retiring lifestyle involves; new hobbies, travel, starting a business
- How much you will require to meet your yearly post-retirement budget
- The primary source of your income in terms of social security, dividends from share portfolios, retirement funds such as 401(k), Roth IRA, Roth 401(k), superannuation etc.
- The age you will start to take social security benefits
- Whether you are interested in having a part-time job or getting into business in retirement
- Whether you will be offering financial support for grandchildren or your adult children
- The amount of debt you anticipate having in retirement
These factors will help you to strategize accurate spending goals, ensuring you get the most out of your retirement without unexpected surprises.
2. Know the period left to prepare
Your current age and the expected retirement age create the initial baseline of an effective financial plan. The longer the period between today and your retirement, the higher the risk your financial strategy can withstand. For young individuals with more than thirty years before retiring, you should get most of your resources in more risky investments such as shares. Although there will be unpredictability, stocks mostly outperform other investments such as bonds over an extended period of more than ten years. More so, you require returns that outpace inflation so that you can maintain purchasing power during retirement.
If you are older, your financial retirement strategy should be focused on income and saving capital. This refers to allocating more money to securities such as bonds that will not give high returns like bonds but are less volatile and offer income that you can spend during your retirement. Generally, a perfect financial strategy should incorporate various time phases. You should also ensure to rebalance your portfolio as your period to retiring changes.
3. Determine your post-retirement spending needs
Knowing your expected spending after retiring will help you define the needed size of your financial portfolio. Most individuals believe that their annual expenditure after retiring will amount to about 20 to 30 percent lower than what they spent initially. This assumption often proves unrealistic, mainly when the loan is yet to be paid off or unexpected medical expenditures come along.
Retirees also often spend more immediately after retiring on travel or other bucket-list goals. You will no longer be at work for about eight hours per day, so you will have more time to travel, go shopping, and other costly leisure activities. To have sufficient savings after retiring, the expenditure rate should be about 100 percent, similar to your current expenditure. More so, the living cost is increasing each year, particularly health care costs. Having accurate spending goals after retiring will help in precise spending because spending more after retiring requires you to save more today. Even more, you may need more money than you anticipate in case you want to buy your home or cater to the education of your children after retirement. You should factor in all these post-retirement plans.
4. Assess your options for saving and investing
There are several ways of saving and investing as you build some wealth for the future. The first option to help you save is the 401(k) account for its tax advantages and employer matching potential. Contributing to the traditional 401(k) can decrease your taxable income, and you pay taxes at your ordinary income tax rate on qualified withdrawals.
A Roth IRA is another option that does not deduct taxes on contributions. This strategy also enables you to withdraw without tax deductions. With a taxable brokerage account, you will enjoy earnings and capital gains. On the other hand, CD, money market, and savings accounts are taxable and help keep your savings in liquid form.
Although Health Savings Accounts (HSA) are not specifically retirement saving accounts, they can still be part of your plan. The account provides tax-deferred growth, tax-deductible contributions, and tax-free withdrawals when the cash is used to cater to qualified health care expenses that include long-term care.
Generally, you can invest and save through several avenues to maximize your yearly contribution limits for the tax-advantaged accounts. However, in case you have a limited amount to invest and save, begin your employer’s option and contribute enough to attain the full company match. Also, do the same with your HSA account at your job as long as your employer matches the contributions. You can then decide how much you can contribute to your IRA, savings account, and taxable accounts. There are several saving plans for Canadians, including; Canadian employment plans, Old Age Security Pension, Real Estate, Employer pension plans, etc. In the UK, offshore pensions are some of the most tax-efficient savings for your retiral investments.
5. Consider complementing your financial resources
Other than investing and saving, you can consider adding other financial tools. One of the tools you should consider is purchasing an annuity. These are insurance contracts that pay you a particular amount of money in exchange for a monthly premium or lump sum. Grants can provide predictable and guaranteed earnings after retiring in addition to savings and social security benefits.
Next on the list is long-term care insurance and life insurance. Although life insurance aims to provide financial benefits to your loved ones when you die, some universal life insurance policies allow you to accumulate cash value you can borrow against during your post-retirement period. Long-term insurance will help cover the cost of an assisted living facility that might deplete your retirement savings.
Bottom Line
Financial planning for retirement is a continuous process, and the sooner you begin, the better. The strategy should start by determining how much you need to save for the post-retirement period, and then decide where to allocate your investments to get the most out of them. Reassessing your financial strategy at least once per year will help you to know whether you are on track to achieve your goal and the changes you might need to make. For better financial planning, you can consider finding help from a reputable qualified financial advisor.
More resources on planning for retirement
The following books provide more detailed information on the topics covered in this article. Feel free to browse through this list and support the site by making a purchase at one of our affiliate partners. Please read our affiliate links disclosure for more information. Note: The links below will open in a new browser tab or window.
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- Retirement Planning For Dummies by Matthew Krantz Link*
- Retirement Made Simple by Noel Whittaker (Australian focused) Link*
- Superannuation Made Simple (Updated for 2021/2022) by Noel Whittaker (Australian focused) Link*
(*) This site contains affiliate links to products. We may receive a commission for purchases made through these links at no extra cost to you. Please read our affiliate links disclosure for more information.
