Our retirement planning is based on three basic things – our work, savings through it, and then the retirement period. However, the base may be the same, but today’s generation faces many challenges those earlier people did not face. Life expectancy has increased longer, which means you need more money to live longer. Interest rates are lowered everywhere nowadays than they used to be. So, expecting a double-digit income through savings is rare. Also, a big headache of old age is the disease. So, you have to count a hefty amount for medical insurance. Furthermore, many organizations are moving away from defined pension plans, which are mostly dependent on market ups and downs.
Retirement is also the golden days that give you scope for endless things you did not do during your working days like exotic travel, cozy family time, spending leisurely moments, and many more. But all these are closely dependent on money. So, budgeting and setting goals for retirement age are essential. Here are few tips that may help you to plan and save wisely for your golden days.
Factors that you should calculate for the savings plan
- Housing costs that include rent or a mortgage, its maintenance, and water
- Healthcare costs
- Cost of living that includes day-to-day living, such as food, clothing, transportation
- Entertainment, including movies, restaurants, and plays
- Travel cost that includes flights, hotels, car fuel cost.
- Life insurance cost (if any)
So, what is the estimated savings amount for your golden retirement? The CNBC report estimates $2 million as per recent market price and depending on the cost of living and demographic of the recent population.
Some advise it is good to have 80% to 90% of your annual pre-retirement income, or 12 times your pre-retirement salary. However, everyone’s situation is different, and they can save based on their capacity.
How to start saving for retirement
Start Early
It is always advisable that you start saving your retirement amount early, no matter if it is $10 a month in your 20’s. However, you may set aside money for your immediate need. But once you are in your 30’s or 40’s its your high time to tackle retirement planning. Additionally, the more you will put money in your retirement account, the more return you will get during your golden days.
Create a Retirement Budget
Your current budget takes into account all your everyday income and expenses. But as you have a retirement goal, you should have a fair idea of what amount you should save to meet that goal. Alternatively, this is your retirement budget. Make it a line item in your budget. It will ensure you set aside funds for this savings every month.
Arrange for Automatic Transfers
This is an effective way to ensure fixed savings every month in your retirement account. For this, set up an automatic fund transfer from your checking account to your retirement account. Furthermore, it should happen on the same day every month. As this fixed amount is going to your retirement account every month, there is no chance of spending that money on another purpose.
Set up an Emergency Account
Having an emergency account always gives you an extra guard. Save up to three to six months’ salary in that account. So that in case of any emergency situation, you don’t need to compromise your retirement savings.
Pay Down Debt
This should be a must-have goal for everyone to get debt-free. The debt may include credit card debt, car loans, home loans, student loans, etc. This will simply help you to avoid owning money during your non-earning years.
Accounts you can use for retirement savings:
High-yield savings account
This is a risk-free account that returns you more than a traditional account. The money invested in this account does not get invested in bonds or stocks. This account gives you the opportunity to grow your money—currently, the overtime in a more traditional investment savings way.
Related post – What is a high-yield savings account?
Traditional Individual Retirement Account (Traditional IRA)
The IRA is an investing tool where individuals can gain tax advantage while making retirement savings. IRAs can be of various types and may have different tax liabilities which are solely dependent on an individual’s employment status. IRA is an individual account that you can contribute to yourself. IRAs are generally tax-deductible. So, for example, if you contribute $5,000, you will get a decreased taxable income amount.
The money you invest in this type of account grows on a tax-deferred basis which means no tax is payable on the investment until it is withdrawn. So, you can compound your money at a faster rate. Furthermore, you need to pay tax on the amount you withdraw. It keeps you in a lower tax bracket during your retirement, which benefits your retirement age as you don’t have any income during those days.
Simple IRA
Many businesses don’t offer 401(k) plans as they are expensive to set up and maintain. Instead, they offer a Simple IRA, which is equivalent to Savings Incentive Match Plans for Employees. However, it works similarly to a 401(k), where both employees and employers can contribute funds. This reduces the taxable income for each side. Here the contributions grow tax-deferred until the age of the employee that they withdraw.
Traditional 401(k) plans
A 401(k) is a retirement account offered by a company for its employees. Like traditional IRA, the investment in this account can grow on a tax-deferred basis as the contributions into this account are pre-tax. You need to pay the tax only when you withdraw the amount. So, it, too, keeps you in a low tax bracket during your retirement age.
There are several benefits to the 401(k)-
- Here, the contribution limit is much higher than it is with an IRA.
- Employers are also allowed to match contributions
Simplified Employee Pension (SEP) Plans
SEP is ideal for self-employed people. This is similar to a traditional IRA, where you can grow your tax-deferred income. This account only can be opened by a business owner to reduce your taxable income.
Stocks for growth
The stock market is another lucrative area where most savers invest money by buying stocks. They either buy stock directly or through a mutual fund or through an exchange-traded fund. They invest, hoping stock prices will increase in the long term. However, the big short come of stock is it can fall, incurring huge losses.
Safety investment – Bonds
Bonds are a safer investment option than stocks. Here you can lend money to a government or company. In return, they provide you an annual payment based on a predetermined interest rate. At the end of that bond’s term, you get back your original investment. This is usually between one and 30 years. Bonds ensure guaranteed annual income and less risk. Of course, it depends on the kind of bond you buy. This is one of the main reasons that bonds tend to fluctuate less than stocks.
The Bottom Line
You can ensure a comfortable future if you choose your investment early, have checked emotions while in your earning years, and find help as needed. It would help if you considered many things related to your retirement investment planning, like when you are going to retire, where you want to settle, what your activities will be during your retirement days, your lifestyle, your healthcare needs, etc.
However, the thumb rule is making it 20 times your gross annual income to retire. Lastly, it would be best if you remembered the big picture too.