Is it too early to start working on your retirement plan? Is it too late? What factors should you consider when planning for your retirement? And where do you even begin?
It's the tail end of 2022, and as the year wraps up and another one looms large, it's time to start making some critical decisions. Sure, most new year's resolutions don't last past February, but some promises are vital to keep.
Take retirement planning, for example. When you are young and thriving, it is hard to pay much heed to advice and articles asking you to start planning as early as possible. But, as a study conducted by Employee Benefit Research Institute concluded, over 70% of retirees wish they had started planning and saving sooner rather than later.
So, when should you start your retirement planning? It's essential to begin the process as early as one can. Start saving consistently, even in small amounts, rather than putting it off for a time when you can invest larger amounts in one go. That said, if you are new to this business and need to learn how to begin the process, it's best to start with the basics.
What Does Retirement Planning Entail?
Simply put, it is the process of planning your finances out for when you retire from the workforce. This could be a planned retirement, i.e., one you take when you reach a certain age. Or it could be unplanned and involve personal illnesses or sudden family responsibilities that make it impossible for you to continue working. Either way, it is essential to consider all factors and rogue elements while planning for your retirement. This process will usually involve six important steps:
- Planning when you are going to retire
- Having a good understanding of when to start planning
- Knowing how big your fund needs to be
- Planning priorities
- Choosing the account, and
- Picking the investments you are going to make
All of these steps need research, careful calculations, and a lot of time and planning. So, if you are unsure if you can handle it on your own, you can always take the help of financial experts.
Steps to Planning Your Retirement Fund
As I mentioned before, there are six essential steps when it comes to retirement planning.
These steps have been explained in greater detail below:
1. Planning When You Are Going to Retire
This is the most important step when it comes to your retirement planning. Planning for when you will retire is essential because it will determine what benefits you can claim. For example, if you are born after 1960, you will only reach your retirement age at 67. So, that's when you can claim full social security benefits. Claim it earlier, and you must let go of a portion of those benefits. Do it later, and the benefits will grow too.
Make sure you take emergencies and rogue elements into account here. Even if you plan on not retiring before you turn 70, family duties, personal emergencies, or illnesses could leave you with no choice but to retire early. In that case, it would be essential to set aside an emergency fund to compensate for the loss of benefits and income.
2. Having a Good Understanding of When to Start Planning
It is essential to start retirement planning as soon as possible. The time to plan is, thus, now. The best time to begin the process would be in your early 20s. But even if you are older and haven't saved a dime yet, don't fret. As long as you save consistently and make smart investments, you should be able to catch up quickly.
3. Knowing How Big Your Fund Needs to Be
This part needs a bit of calculation and a lot of careful consideration. How much money will you need after you retire? Financial advisers usually ask you to aim for saving funds that cover about 70-90% of your pre-retirement income. But this number can vary depending on whether you need to set aside money for foreign vacations, family commitments, etc. it is also important to set money aside for major health emergencies. Again, take all of your personal and unique needs and wants into account so you can come up with a comfortable number here.
4. Planning Priorities
Regular expenses make up one portion of the fund you will have to save. There are, of course, other things you need to plan for too. Some people have student loans they may need to clear. Others may have piled up credit card debts. There are emergency funds and money you need or want to set aside for your kids and grandchildren. You may also want to travel more after you retire. That can take a hefty amount of money too. Consider all of these when calculating how much you need to set aside annually or every month.
5. Choosing the Account
Choose where you are going to put the money you are saving. Setting money aside for your retirement is only the first step. You also need to know where to put that money so it can continue to grow. For example, if your employer matches every dollar you save, that would be a great place to start. If you are a freelancer, you can open up your retirement account.
The best retirement savings accounts will give you tax benefits. If your company offers excellent retirement plans, consider making full use of them. For self-employed people, IRA is a great option too.
6. Picking the Investments You Are Going to Make
Don't just save. Invest your money so it can keep growing in the long run. Most retirement accounts offer a range of investments you can make. You can invest in bonds, stocks, and mutual funds. Choose a decent mix of low, medium, and high-risk investments depending on what you are comfortable with. Financial advisors usually suggest that you take more risks when younger because dealing with market fluctuations can be easier. The older you get, the better it will be to dial back and make medium and low-risk investments.