When you imagine your retirement, what do you see? Maybe you want to travel the world. Perhaps you envision opportunities to volunteer and give back to the community. And of course, there is the dream of sitting on a beach, sipping something cold and doing absolutely nothing.
Reaching your goals — whatever they are — requires a retirement plan. Without planning now, there is a good chance you will outlive your money later. That’s an experience no one wants. The following steps can help you create a retirement plan aimed at your ideal future.
1. Ask yourself: How much money do I need to retire?
You can’t save for a goal you don’t have. The first step to creating your retirement plan is figuring out how much you need.
“Look at your life and how you want to live it,” said Ryan Inman, a fee-only financial planner and founder of Physician Wealth Services. “You start by working backward.”
Take a look at the type of things you will likely do in retirement. How much money will you need to live on to reach your goals? If you plan to travel a lot during retirement, you will need more money than if you expect to stay mainly at home. Living in an expensive city means higher costs than sticking to an area with a low cost of living. Take all of this into account.
Your needs also depend on when you expect to retire. “How you save is different depending on when you start and how long you have to save,” said Inman. Someone who wants to retire early doesn’t have as many years to build their retirement fund. Plus, if you start saving for retirement later rather than sooner, your monthly savings needs are different.
For example, say you want to retire at age 50 and you know you’ll need $900,000 to accomplish your goals. You are 25 right now, so you have 25 years until you retire. If you have $1,000 sitting in your account right now, you need to set aside $1,000 a month to reach your goal, assuming an annual return of 8 percent.
On the other hand, if you expect to work until you are 65, providing you with 40 years to save, setting aside $300 a month will more than do the trick:
The less time you have to save, the more you need to put in each month. By working backward, you can get an idea of your long-term needs, and how much you should save.
2. Know your ‘why’
None of this matters, said Inman, if you don’t know why you are saving. He said picking a number, even after some deliberation, won’t help much if you aren’t sure of why you are setting aside money in the first place.
“View money as a tool to use to get what you want,” said Inman. “Look at your goals, and what you want to do personally and professionally today, and not just during retirement.”
He said that clarifying why you want to travel or why you want to volunteer can help you figure out the deeper meaning in your life. Maybe you want to save your money and live a healthy lifestyle now because you want to be able to go camping with your grandkids later.
“It’s really about behavior,” Inman said. “Just getting a pile of money isn’t enough for some people. There has to be a reason behind it.”
If you expect to stick to your retirement plan, Inman said, you need to have a solid “why” behind the number you pick. Tie your retirement goals to something that matters to you at your core. That makes it easier to say no to buying another unnecessary trinket for your shelf or to splurging for an expensive night on the town.
3. Save as much as possible
You might have figured out your retirement needs, and found your reason for saving, but you still need to save as much as possible. It’s nice to think that your investments will offer an average return of 8 percent a year, but what if your portfolio only brings in 6 percent?
Inman said that it makes sense to save as much as possible. Once you know your basic retirement needs, consider saving even more. That can help you build a buffer so that later market events or disappointments are less likely to destroy your nest egg.
He also pointed out that not everyone can save to their projected need during the early stages of working.
“It might not seem like it means a lot to put in $50 a month, and in the grand scheme of things it won’t,” said Inman. “But you’re training yourself to save and put away. The process is more important than the actual amount of money at first.”
The key is to boost your retirement plan contributions as your financial situation improves. “Once you have the habit of saving, it becomes part of your makeup. Just assume you will save as much as you can no matter what stage of life you’re in.”
4. Make consistent contributions
A successful long-term retirement plan also requires consistency. This is especially true when you have limited means, said Inman. “Most of us can’t put tens of thousands of dollars into an account at once,” he pointed out. “Consistent investment in your retirement account can add up over time. But you have to make it a habit.”
Inman recommended setting up automatic contributions. “Treat it like a monthly fee,” he said. “You get used to it and might not even notice what you’re putting in.”
Most workplaces offer a way for you to automatically contribute to a retirement account with money from your paycheck. Even if you don’t have an employer-sponsored retirement plan, many workplaces will automatically deposit money in an outside savings or retirement account.
You can also set up an automatic investment account on your own, creating a transfer from your checking account to your retirement investment account on a regular basis. “Whatever you do, make it easy to save,” Inman said. “Simplify so you actually do it without thinking. That will keep you on the path to financial success.”
5. Manage your retirement accounts
Once you max out your 401(k) match (if it’s offered), Inman said to consider looking into putting money into an Individual Retirement Account (IRA) outside of your work. “Sometimes the offerings and the fees in a company 401(k) aren’t ideal,” he said. “You can save money on fees and find better funds sometimes if you go on your own.”
When deciding between a traditional IRA and a Roth IRA, Inman recommended that you consider the tax implications. With a traditional IRA, you receive your tax benefit today. However, as with the traditional 401(k), you pay taxes when you withdraw the money during retirement. When you invest in a Roth account, you pay taxes on the money today, but it grows tax-free. You won’t pay taxes on your withdrawals later.
“It wouldn’t hurt to talk to a financial professional about the tax impact,” Inman said. “Generally, though, if you are still young and you are eligible, the Roth is a great choice.”
If you max out your IRA contribution, Inman said, it makes sense to go back to the company retirement plan and get as close to possible as you can to max out your contributions there too.
Finally, Inman said to think about what happens if you want to retire early. “You face a possible penalty if you withdraw money before age 59 and a half,” he said. “If you know you want to retire by age 55, you won’t be able to access that money. Your retirement planning will probably need to include a taxable investment account without all the withdrawal rules of a tax-advantaged account.”
6. Pay attention to asset allocation
The proportion of stocks and bonds you have in your portfolio matters more than your individual investment choices. This is called asset allocation. Inman recommended using index mutual funds or index ETFs (exchange-traded funds) to build a portfolio. That way, you in invest in groups of assets, and you don’t have to worry about picking individual stocks or bonds.
When you are younger, said Inman, you want more stocks in your portfolio than bonds. A higher percentage of stocks allows you to amass value faster.
“The younger you are, the more risk you can handle,” said Inman. “Besides, most of us need the market to help us out. With an average income, you can’t hope to reach your retirement goals without stocks in your portfolio.”
“As you move closer to retirement, you shift your asset allocation toward bonds,” Inman said. “While there are rules of thumb, the reality is that part of it has to do with your comfort level and financial situation.”
Every year, he said, check to see if you need to rebalance your portfolio by selling stocks and using the proceeds to buy bonds. Your retirement plan should plot gradual shifts toward more bonds as you approach retirement.
Consider professional help when developing your retirement plan
While it’s not necessary to work with a financial professional, Inman said, it can help when figuring out how to plan for your retirement. A financial planner can help you set retirement goals and evaluate your needs. Plus, a good financial advisor can help you stay on track and tweak your retirement plan when necessary.
“Everyone’s plan is different,” said Inman. “Personal finance really is personal.”
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