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Understanding Retirement Planning
In the simplest sense, retirement planning is what one does to be prepared for life after paid work ends. This isn't just financially but in all aspects of life.
The non-financial aspects include lifestyle choices such as how to spend time in retirement, where to live, and when to quit working altogether, among other things. A holistic approach to retirement planning considers all these areas.
The emphasis that one puts on retirement planning changes at different stages of life. For instance:
- Early in a person’s working life, retirement planning is about setting aside enough money for retirement.
- During the middle of your career, it might also include setting specific income or asset targets and taking steps to achieve them.
- Once you reach retirement age, you go from accumulating assets to what planners call the distribution phase. You’re no longer paying into your retirement account(s). Instead, your decades of saving begin paying you out.
How Much Do You Need to Retire?
Remember that retirement planning starts long before you retire. The general rule is the sooner you start, the better. Your magic number, which is the amount you need to retire comfortably, is highly personalized. But there are numerous rules of thumb that can give you an idea of how much to save.
How much you need depends on who you ask. For instance:
- People used to say that you need around $1 million to retire comfortably.
- Other professionals use the 80% rule, which states that you need enough to live on 80% of your income at retirement. So if you made $100,000 per year, then you would need savings that could produce $80,000 per year for roughly 20 years, or a total of $1.6 million, including the income generated by your retirement assets.
- Others say most retirees aren’t saving anywhere near enough to meet those benchmarks and should adjust their lifestyle to live on what they have.
While the amount of money you'll want to have in your nest egg is important, it's also a good idea to consider all of your expenses. Be sure to calculate the costs for housing, health insurance, food, clothing, and your vehicle/transportation. And since you'll have more free time on your hands, you may also want to factor in the cost of entertainment and travel. While it may be hard to come up with concrete figures, be sure to come up with a reasonable estimate so there are no surprises later on.
Steps to Retirement Planning
Regardless of where you are in life, there are several key steps that apply to almost everyone during their retirement planning. The following are some of the most common:
- Come up with a plan. This includes deciding when you want to start saving, when you want to retire, and how much you'd like to save for your ultimate goal.
- Decide how much you'll set aside each month. Using automatic deductions takes away the guesswork, keeps you on track, and takes away the temptation to stop or forget depositing money on your own.
- Choose the right accounts for you. Take the chance to invest in a 401(k) or similar account if your employer offers that option. Remember, if the company offers an employer match and you don't sign up, you're just giving away free money. And don't forget to have an emergency fund, which can be easily liquidated if you need cash in a pinch.
- Check on your investments from time to time and make periodic adjustments. It's always a good idea to make any changes whenever there's a change in your lifestyle and when you enter a different stage in your life.
- Then you contact us as soon as you are ready