Guide to Retirement Planning
Mention retirement planning and most of us think of it as “planning that needs to be done, but can wait till later”. Not correct, if you see the number of senior citizens all over the United States struggling to make ends meet. If you want to breathe easy during your golden years, get started with your retirement planning now.
Why Start Early?
The answer is simple – the magical powers of compounding. If you are 25 now and are planning to save $1,000 in your retirement account every year, the money will earn you 8% interest annually. The best thing about doing your retirement planning early is that you can save only for 10 years and stop at age 35. What happens to your retirement account then? It keeps growing! When you turn 65, it will fetch you a whopping $169,000 approximately. Start the same process at age 35, and the amount will be much less, even if you invest for a longer period.
How Much Will You Need?
This is the easy part. There are a number of online calculators that offer to make these calculations for you. Once you feed in details like your current income and savings pattern, you will be told how much you would need for a comfortable retirement. Traditionally, it is estimated that 70% of what you earn now should be enough for a peaceful retired life, unless you have huge mortgages or medical bills to take care of. Apart from retirement planning for financial stability, you must also consider health insurance, life insurance and long-term care insurance. Experts suggest that you set aside 7% of your total income for payments towards premiums. The catch here is to buy early, since premiums keep escalating with age.
IRA, Roth IRA & 401k
Earlier retirement plans offered by employers used to be considered the best retirement planning tool, but after fiascos like Enron, many are choosing to put their money in individual accounts, like the IRA and Roth IRA. An IRA account is very popular for two reasons: there are no taxes levied on your money, plus you can deduct your IRA contributions when paying your regular taxes. Next is the Roth IRA, which is relatively new and contributions are made after tax deduction, meaning you will not be able to claim any kind of tax deduction for your contributions. The plus side is that the money that receivable at retirement is tax free too. A number of people take their money from other retirement accounts and convert it Roth IRA, precisely to avail of this benefit. Even better news, with effect from 2010, the IRS is lifting its restrictions on Roth IRA rollovers, so you may consider getting your Roth IRA rollover set up. Also, there is the 401(k) account which is usually opened by employers, but you do so on your own too.
Stocks, Bonds & Annuities
Planning to make some big bucks and open to risks too? Consider the stock market. If you expect to retire 20 years from now and are getting started with your retirement planning, stocks and bonds should account for at least ¾ of your portfolio. If you are planning to grow a nest egg, consult your financial advisor and decide on the amount of risk that is healthy for you. If you are a risk taker, include private equities and hedge funds in your portfolio. Look at annuities too, a retirement planning option that asks you to either make a onetime payment or in installments over a number of years, and you get returns every year, biannually or monthly.
Insurance & Real Estate
Real estate figures topmost in most people’s retirement planning strategies. It is a sound long term strategy for wealth creation, especially with the low rates in the current market scenario. The chief aim of investing in real estate is to produce a regular income that you can bank on every month. Planning to make money from real estate does not include buying a property to live in, since you do not receive any kind of regular cash flow from the place where you reside yourself. Your retirement planning must also include where you choose to live after retiring, since your location too will have an impact on your expenses. Thankfully, there are many regions in the United States that welcome retired people and have low living costs.
Retired life can be no fun if you have huge mortgage payments or unaffordable healthcare on your mind constantly. Proper planning, like cutting back on a few frills early on, so that you may have more money for later, is always a wise decision. So gather as much information as possible, make use of all the free resources available online, consult your financial advisor, and work towards your retirement planning today.
Retirement Planning Resources:
The Bogleheads’ Guide to Retirement Planning
Save Your Retirement: What to Do If You Haven’t Saved Enough or If Your Investments Were Devastated by the Market Meltdown
The New Rules of Retirement: Strategies for a Secure Future
