Retirement planning doesn't have to be brain surgery, but it does take some work. Remember to start as early as you can, as you'll never get back those years. However, even a late start is a good one! Here's a guide to help you through the process.
Calculate Your Ideal Nest Egg
To effectively save for your dream retirement, create a plan of how much you want to have in your retirement fund when you retire. This involves a few steps:
Estimate the expenses you will incur during retirement: make sure to include old age expenses as well, such as long term care insurance premiums and other related medical expenses. Also include funds for activities that you will finally have time for in old age, which you didn't have before, such as extended vacations and hobbies that you've been wanting to pick up.
Calculate how many years your nest egg will need to last for your retirement: If you retire at age 60, you may be looking at a 30-35 year retirement time frame, whereas if you plan on retiring at age 70, you may only be looking at 20-25 years. Knowing when you want to retire, and thus how long you want to be in retirement for, is a big factor in determining monthly contributions. Remember to make a higher, rather than lower estimate - every planner's worst fear is running out of money, before life runs out.
Nest Egg Size: From these two amounts, decide how big you want your retirement fund to be when you stop working. This should take into consideration on your expected expenses per year, the length of time you plan to be in retirement for, and the expected inflation.
Pick Your Sources of Income: With an ever-changing market and tax law, a good retirement planner should be sure to have a diversified portfolio, in terms of income sources and tax qualifications. This portfolio should allow you to take advantages of the different tax benefits offered, as well as the different savings techniques. While some retirement investments may be tax free, others may be taxed at the capital gains rate, or the ordinary gains rate. Pay close attention to this when choosing. Popular sources of income often include Social Security, employer pension funds, 401(k) plans, IRAs, TSPs, SEP-IRAs, Simple IRAs, personal investments, and savings accounts.
Throughout the Years
Make Goals: Having specific goals in mind are key to keeping firm to the saving mentality. It allows you to look forwards to something in the future, and gives you an incentive to refrain from spending now, in order to enjoy later. Plan out your retirement vacations. If you wanted to go to the Bahamas, to London, and to Japan, plan them out, and put these plans with your retirement plans. This way, whenever you lose your will to save, you can glance at them and renew that motivation to save. Have meaningful goals that represent life long dreams of yours, something that puts your passion, your energy, and your love of life to use.
Pick up a Side Job: Whether this is while you are working or in retirement, a side job doing something you love can give you just a little extra income, and can also help to add a sense of purpose and fulfillment to your life, especially in retirement. However, if you are already retired, be careful with how much you earn from the side job because your social security benefits may become taxable if you earn above certain limit.
Milk Your 401(k): If your employer offers 401(k) contribution matching benefits, take full advantage of it. This is free money!!! Your employer is helping you to build a solid foundation to your retirement fund with great tax benefits.
As You Begin To Head Into Retirement
Prepare your living arrangements now: Find and buy the home you plan on living in during retirement, or pay off the mortgage on the existing one now. Ensure that all appliances are in good working condition and make repairs as necessary. This will minimize preventable unforeseen costs in retirement
Eliminate Debt Now: If ever there was a Grinch to ruin retirement, it was a creditor wanting payment. Save yourself the headache and stress by paying off all outstanding debts before you retire, starting with the smallest (or the highest interest rate) first, and then work your way to the others. Read the Debt Management section for further details.
Work With Your Spouse to Adjust Your Lifestyle: For couples who are used to spend 8+ hours away from home, and away from their spouse everyday, it will take an adjustment period to learn to live so closely with each other. Find hobbies and activities that you can do together, and then you can do on your own.
Plan for Long Term Healthcare: Do your research on policies that are available now, before you need it, so that the process is as stress-free as possible when you are in retirement.
Estate Planning: Make sure to keep you estate, will, and trusts updated regularly to reflect your changes in investments. It would be a shame for your beneficiaries to lose out on your hard work just for lack of a plan.
Go With the Flow: Although you may have a set retirement plan, be ready to improvise. If the stock market crashes and you lose half of your investments, as many individuals did in the last few years, be ready to delay retirement, relocate to a different city with a lower standard of living and expenses, or to pick up a retirement job. Think creatively.
Review: Make sure to review your plan regularly, and to monitor how your nest egg is growing as you go. If you see a large gap between a benchmark amount at year 10 and what you actually have, consider increasing monthly contributions.
Remember, every individual is unique, and there is no one formula for a retirement nest egg that will suit you the best. Make sure to consult a professional financial planner and/or your spouse or loved ones to devise the best plan for you, so that you may have the best possible retirement!
Once you retire, congratulations! Now go have fun and enjoy that money you worked so hard to earn and save. For tips on how to stretch your retirement fund as far as possible, see our section on Saving Habits.
