- Creating a plan for the future is essential for financial stability in retirement.
- Smart planning should include an estimation of your expenses in retirement, setting a dollar figure as a goal and then developing a savings plan in accordance with this number.
- Starting early, even if one can only save a small amount, is important for successful retirement planning.
Preparing for retirement often spans decades and is an experience that should be continuously worked on, added to and refined throughout your years.
What’s most important is starting to craft a plan for your golden years, upon which you can expand and adjust over time. This guide will cover the essentials of retirement planning, including how to begin saving for the future, when you should start and additional tips to help you succeed.
Why is retirement planning important?
Retirement planning is essential to ensuring financial security for yourself later in life. Reaching your financial goals, as they pertain to retirement, has several benefits, including:
- Having enough money saved to cover your basic living expenses once you have reached retirement age
- Having money to pursue other personal and financial goals after retirement age
- Being able to leave a legacy for your family after retiring
- Having a cushion for unexpected emergencies, such as medical expenses or long-term care during retirement
In short, initiating sound financial planning early means retirees can maintain their quality of life and feel confident in their finances.
However, saving enough may feel overwhelming earlier in life. Roughly half of adults 55 and over in the United States have entered retirement, meaning retirees may need a few decades’ worth of money saved up to cover their expenses. As a result, planning early becomes important for reaching your goals, though those goals may look different for everyone.
Determine your retirement goals
Everyone’s path to retirement is different, and each retirement plan should be customized to the individual’s needs and goals. As you begin retirement planning, consider your aspirations for retirement. These might include:
- Mentoring others
- Pursuing hobbies and interests
- Feeling secure in your finances
- Relaxing and spending more time with family and friends
Once you gain a sense of your goals and the amount of money you need to retire, the size of the nest egg you require becomes easier to calculate.
Figure out how much money you need to retire
One of the initial steps to retirement planning is to set a dollar amount as a goal. According to the U.S. Department of Labor, individuals need between 70% and 90% of their pre-retirement income to sustain their lifestyle in retirement.
As a result, creating a savings plan for retirement should begin by assessing one’s current cost of living. Examine how much money you spend to maintain your lifestyle each month and create a rough estimate of your retirement needs by calculating 80% of that figure. From there, you can refine your goal by anticipating the cost of housing, transportation, healthcare and other expenses when calculating the total amount needed in retirement.
Then consider your aspirations and any additional costs. Those who wish to travel frequently during retirement may require more than 80% of their current income, while those who anticipate higher-than-average medical costs may need to save even more.
Overall, estimating costs for retirement forms the foundation of your plan and helps determine how much money to start contributing to your retirement fund.
Start saving now
In general, the earlier one begins to plan for retirement, the better. Starting now, even with a small amount of money, establishes a habit of saving and allows more time for your savings to accumulate.
As you create your retirement savings plan, consider the following tips:
- Create a budget: Budgeting helps you use your money most effectively, helps you better understand your living expenses to gain insight into how much may be needed in retirement and also helps track your progress on retirement savings over time.
- Start small: Set a savings goal that feels manageable today. Even a small amount grows over time, and your retirement plan can evolve as your earnings increase.
- Set up automatic transfers: Make retirement planning effortless — and ensure you won’t forget a payment — by using automatic transfers.
- Focus on paying down debts: Consider setting smaller retirement goals, temporarily, that allow you to more aggressively pay off debts. Once debts are repaid, those funds may be used to meet your savings goals, including retirement planning.
Investing for retirement may look different for everyone, but a few available options can be prioritized or adapted to your financial goals.
Invest for retirement
Just as saving for retirement is essential, so is using your savings to maximize returns. Investing can grow your money for retirement, and you can seek out several investment options to aid in your retirement planning.
Savings options for retirement might include:
- Social Security and pension benefits: Your Social Security allocation may cover some expenses, while pension benefits from your employer may provide some income in retirement.
- Workplace retirement plan options, such as 401(k) and 403(b) plans: Many companies offer employer match benefits, so your employer will match some or all of your contributions to grow your savings faster.
- Retirement savings accounts, such as an individual retirement account (IRA) or Roth IRA: These investment accounts allow you to grow your retirement savings over time, although contribution limits dictate how much you can deposit each year.
Placing your money in a savings account helps your nest egg grow over time. Most financial institutions offer compound interest, so you will earn interest on the principal — the amount of money you’ve deposited into the account — as well as interest earned on the principal thus far.
Ultimately, a retirement plan may include several savings and investment vehicles, and a financial advisor can offer personalized guidance to select the right ones for your unique situation and goals.
Consider other types of possible retirement income
In addition to setting up a retirement savings account, consider other avenues that might provide an income in retirement. These might include:
- Home equity: Equity in your home or other real estate may offer security in retirement. Understanding your options, such as downsizing or taking out a cash-out mortgage, can help you fit home planning into your retirement plan.
- Stock investments: Money invested in the stock market, such as in index funds, or in individual or mutual funds can generate wealth and help provide for you in retirement.
- Part-time work: Maintaining a part-time job in retirement can help supplement your income, offers an avenue to stay active and engaged in your job and may come with the potential to maintain health coverage benefits.
Having at least one other source of income in retirement, in addition to a traditional savings account, can provide stability as you enjoy retirement life.
The bottom line
Crafting a retirement plan offers a path to security in one’s golden years and can help you feel secure as you begin to plan for life after leaving your career. Regardless of when you start, your current financial situation or your ultimate goals for retirement, the opportunity to grow your wealth for yourself and your family is one that pays dividends.
Remember, each individual’s goals for retirement — and, thus, their retirement plan — are unique. Assess your needs and goals to craft a plan that’s uniquely suited for you, and feel confident in your finances as you work toward retirement.