The process for retirement planning hasn’t changed much throughout the years. You go to work, you save money, and you retire. While the process is the same, there are more challenges the newer generations have to face that previous generations didn’t.
For one, people are living longer. This alone introduces a major change. After all, if you are living longer, you’ll need your money to stretch further. Likewise, yields stemming from safer investment strategies like bonds have never been lower. Because of this, you cannot generate the same high yields that previous generations did without taking risks. There’s also a newer health crisis’s hitting the globe seemingly every year at this point.
This is only compounded with more and more companies going away from the traditionally defined benefit pensions. These pensions would guarantee that you earned a certain number in your retirement years. Companies have moved more to defined contribution plans which have much more volatility.
Therefore, you may be wondering how you can enjoy your retirement the way you’ve always wanted. Anyone that is retiring is going to want to experience everything they weren’t able to do when they were spending their time working. Whether it’s training for the marathon, enjoying exotic vacations, or even spending quality time with friends and family. There are so many possibilities. There are plenty of different steps you can take which will be explained in this brief guide. You will learn how to effectively budget and set goals for your retirement. You will also learn how to choose the right retirement savings account to accomplish your goal of retiring with enough money to support yourself and your spouse.
One of the main issues that can make retirement planning so difficult is not knowing what you will be like as a 70-year-old. The future is unknown. Because of this, it can be overwhelming to save for it. You can even get so overwhelmed that you don’t save anything for it. The truth is, planning for your retirement isn’t too difficult. However, you do need a defined plan and road map. You also need a plan with flexibility because your financial situation can change drastically from year to year.
The very first thing you want to do is figure out how much everything is going to cost you. No one knows what the prices of everything are going to be like in the future. With rising inflation, it’s hard to tell. In recent years, inflation has run below the Fed’s main benchmark of 2 percent. However, inflation on average over the past century ran closer to 3 percent. Therefore, you need to account for higher prices for everything when planning for the future. You also want to consider all of your daily expenses. You need to factor in food costs, housing, and even health care costs. Keep in mind, that some of the more costly expenses you have right now including childcare, and a mortgage likely won’t exist. As a result, you won’t need to account for those expenses at the time of your retirement.
You then want to go ahead and add up all of the income that you will be receiving after you stop working. These things can include any pension income (if applicable), social security payments, and any other money you will have coming in. Include rental income from properties and anything else that will bring cash flow. You then want to match up the revenue and expenses to get a good feel for what you are going to need to have saved to have a proper nest egg for your retirement.
What’s the magic number?
There has been a lot of talk among experts about there being a magic number. Some financial experts claim that the number is as high as $3 million as costs rise. Some will say to look at your pre-retirement income and save 70 to 80 percent of it. Some will say that you will need to save as much as 13 times your salary pre-retirement. While these are certain numbers that have some validity to them, they should only be used as a guide. They shouldn’t be used as gospel because everyone will be in a different situation. A lot of it depends on your desired lifestyle.
How do you start to save for your retirement?
Getting started with your investment journey for retirement is always a good idea. You want to start as early as possible to leverage the power of compounding. However, you don’t want to start investing money if you need that money to live. It’s always a good idea to set money aside for an emergency fund and your immediate needs. You can always begin to tackle your retirement in your 30’s and 40’s. It’s best not to wait any longer than that because you want your money to work for you. If you wait too long, you will find that you need to save more money each month to achieve the same gains.
What investment accounts should you choose?
First, you want to make sure that you have a diversified investment portfolio. Many investors do not have exposure to precious metals. This is not good because most smart financial advisors recommend that you have at least 5-15% of your portfolio in precious metals, to balance out the volatility in the rest of your account. If you need help getting started with investing in gold and silver, take a bit of time and read this American Bullion review. This will help you learn how to add physical gold and silver to your portfolio in a tax advantage manner.
Everyone should be setting aside some money each month to save for their retirement. This is the most crucial component of saving for your golden years. However, you aren’t going to be able to reach your goal without investing. You need to invest the money because it can help you leverage the power of compounding. Compounding is the process of gains growing your gains. For example, say you invested $200 one year and it rose to $210 the following. The following year, your initial investment would be $210 and not your initial investment of $200. This allows you to use your gains to grow your investment total even more. Throughout time, these gains can add up and allow you to maximize your nest egg. You can indeed compound your losses, as well. However, the market is generally designed to go up and that’s been the case throughout history. It doesn’t matter what accounts you use, you’ll find that your investments will continue to compound annually.
Accounts You Can Use for Your Retirement:
– Traditional Individual Retirement Account (Traditional IRA)
The traditional IRA is an investing tool for retirement. It’s a tax-advantaged account. While it can vary based on the individual’s employment status, it’s an account you would be contributing to yourself. Depending on your employment status, it will have different tax liabilities. One of the biggest benefits of starting a traditional IRA is that any of the contributions you make are tax deductible. Therefore, you will be able to decrease your taxable income by the $6,000 max contribution limit annually.
Along with this, the money that grows in your IRA will not be subject to tax until your withdrawal date. This helps you leverage your money longer to boost your returns because you can continue to compound with tax-deferred money. You will end up having to pay tax on the money that you withdraw from the account, but it’s going to be subject to your current tax rate and not one that was likely higher when you were working. Your income is likely to be very low at your age of retirement. Therefore, you won’t have to pay hefty tax penalties. However, there is a 12 percent penalty that you will need to pay if you take out any funds before turning 58 years of age. However, you can move as much as $120,000 without worrying about penalties if you’ve been a person that has been affected by the pandemic and covaids.
The maximum contributions and various income limits are constantly changing. As of right now, you can invest as much as $5,000 annually. However, anyone over 55 years of age can invest up to $6,000. These are what are commonly referred to as catch-up contributions. However, once you turn 77 years old, you need to start removing the money from your retirement accounts. You will have different minimums based on your account size and life expectancy. Therefore, you would want to discuss your options with a qualified accountant or financial advisor before withdrawing anything. If you don’t end up withdrawing the requisite amount needed, you could end up getting hit with a major tax penalty.