Ideally, retirement should be a good thing. This is the time to slow down and reward yourself for all your years of hard work. It’s also a time when you should relax and do all those things your career life never allowed you to do.
However, this idea of retirement is getting increasingly dimmed by debt, financial strife and bankruptcy filings. The good news? This does not have to be your story. The question then is:” Exactly how should I plan for retirement? “Read on.
Your retirement will be backed by one thing: finances. While you might decide to downsize, you still need a source of income to fund your day to day living expenses.So what are some real world examples of retirement planning programs?
1. Save, save and then save some more
If you already have a savings plan in place, hold on to it. If you don’t, you have to get started. Start small if you have to and then gradually increase the amounts you’re putting away every month. Age does not matter. If you are young and just got your first job, you should probably save as much as you can. Saving is a habit and the longer you wait, the harder it will be to start. Again, when family obligations come calling, your disposable income will significantly shrink.
2. Contribute to your employer’s retirement savings
401(k) plans are no longer compulsory. This is rather disadvantageous to employees in the long run if you think about it. If you are lucky enough to work for an employer with a retirement benefits savings plan, take it up.
It will help you save, and it will lower your taxes as well. Some companies also match your savings plan increasing the amounts you put away. This is essentially free money. Over time, the compound interest and tax deferrals will make a significant difference in your retirement savings kitty.
Another similar account is the more traditional Individual Retirement Account (IRA). Here, you contribute against your gross income, and the money can be deducted from your taxes. There is also the Roth IRA which is deducted post-tax and does not allow for a tax deduction. However, the Roth IRA allows the member to withdraw tax-free at retirement. One-participant 401(k) is also available for self-employed people (with no employees) and freelancers as well.
Saving is fine but investing is better. For your money to grow significantly, investing is the best option. Saving your money almost shrinks it because it can’t compete with inflation.
So the question becomes, “What is the best investment plan for retirement?”
As with other investments, it is key to balance between risk and investment. Here are a few suggestions to consider for your retirement fund:
• Build a total return portfolio
A total return is the actual rate of return of a pool of investments or a single investment over a given period. It combines interests, dividends, capital gains and distributions received over specific durations.
Such a portfolio is designed to give you a reasonable, long term return. Further, you are allowed to withdraw 4-7 % yearly, and the percentage will increase in subsequent years to tackle inflation.
• Retirement income fund
This is a type of specialized mutual fund. The fund automatically allocates your money across a diverse portfolio of stocks and bonds; this is often achieved by owning a selection of mutual funds. Retirement income funds offer fewer guarantees than annuities but come with more flexibility.
The goal of such an investment is to provide a monthly income, which is then distributed to you. On average, a retiree can withdraw 4% and can expect their money to span through 30 years.
With a retirement income fund, you can withdraw a percentage of your principal, in turn, your monthly revenue goes down.
• Immediate annuities
Even though they produce a return, annuities lean more towards insurance rather than an investment. An annuity ensures you get a future income. By paying a lump sum to your insurer, your insurer guarantees you an income for life, or a duration agreed upon in your contract. It is important to note that this guarantee is as good as the insurance company you pick so it’s essential to pick a solid one.
These are best for retirees with limited sources of income, those that retire fairly early and those who tend to be big spenders or to live beyond their means.
When investing in bonds, you are essentially loaning money to the municipality, government or a corporate. Subsequently, the borrower pays you interest for a specific duration of time, and once the duration lapses, they refund your principal. This interest is what you can live on in retirement. However, the value of bonds will fluctuate with market interest rates. Nonetheless, buy bonds for the income they produce and not for high future returns.
• Real estate
You can also look into rental property or crowdfunding ventures that flip houses for resale. If you purchase the right property in good locales and manage it yourself, it can make better returns than traditional passive income options. If you hire a property manager to run the property, then be ready to lose 8%-10 % of the rental income to management fees.
Take into account the down times when your property will be vacant as well as repair and maintenance costs. If well managed, all these expenses can pay for themselves and still leave you a reasonable amount to live on.
When Should You Start Planning For Retirement?
While it may seem a tad too early, you should start thinking about your retirement in your 20’s, or immediately you start your first job. Your first job might not pay much, but anything you put away now goes a long way.
Think of it this way as well, you have no kids and childcare expenses, you are yet to take a car loan or a mortgage and you are able to take extra jobs at this point. When you are well into your thirties, your disposable income will significantly reduce and keep reducing; what with more children, school fees, house expenses and what not.
In this view, to give yourself a head start and to counter the days when you will not save as much as you would like to, start early and save as much as possible in your early career days. Consequently, if you are able to commit your savings into an investment plan with stable returns in your 20’s you can only imagine the accrued gains 40 years on after you reach retirement age. Compound interest is all about time. Therefore, the younger you are, the more valuable compounding is to you. Similarly, you also have time to make some investment mistakes and recover from them.
How Do I Calculate My Retirement?
With the investment and saving options taken care of, then the next step is determining how much is enough for retirement.
Now, there are no convenient figures to attach to this question because there are several variables.
- At what age do you want to retire?
- What standard of living is ideal?
- Your expenses, including unforeseen expenses such as healthcare and caregiver fees.
Having said that, it is still possible to come up with a ballpark figure of what is enough for you. Here is how to go about it:
1. Settle on an age at which you would want to retire.
2. Determine an annual income that you will require if you were to maintain your current lifestyle. 80% of your current annual salary is just about fair.
3. Add up the current value of your investments and savings.
4. Determine a workable real rate of return on your ongoing investments. A workable figure would be 6%-10%.
5. Get actual figures of your social security and pension plan benefits.
If you are not particularly confident about your numerical skills, there are numerous retirement planning tools available. When you get the final figures on what will be coming in, versus what you will need per month/ year, then the difference is what you need to make up before you take the plunge.
Depending on the amounts, you might have to push your retirement date forward, or take an additional job.
If you are using retirement planning tools, they should give you all the fields to fill in and make the computation for you. All in all, keep in mind that with medical technology and quality of life, the life expectancy rate is likely to go up. It could be up to 85 years. Women outlive men, and life expectancy is higher for women than it is for men.
It’s also important to note that there are numerous other factors not accounted for, for example, inflation, medical expenses, how many exact years you will live, and other unplanned for expenses. Ordinarily, people without family will likely go into residential senior’s homes or hire in-home care. These services do not come cheap and can quickly eat into your retirement fund.