Retirement. Some call it the world’s longest coffee break. After years of early mornings and late nights, freedom and relaxation are finally coming your way. But are you prepared? On the surface, the steps of preparing for retirement have not changed over time.
They still involve working, saving, and ultimately retiring. However, today’s conditions are quite different, and savers experience some challenges that did not exist in the previous generations. That said, it is never too early to start preparing for your retirement. Planning for retirement begins with evaluating your retirement goals and how to achieve them. You will also need to build a financial cushion to give you the retirement you have always envisioned.
Here are some tips on how to prepare for retirement.
- Know your Time Horizon and Invest for Growth
How long do you have till retirement? Comparing your current age and the anticipated retirement age can be a perfect starting point for great retirement planning. If you are young, with a long time till your retirement, you can tolerate a higher risk level. For instance, if you have 30 years till retirement, you can channel up to 75% of your savings in stock. While they might involve a higher risk, stocks guarantee a higher ROI.
On the other hand, older savers’ portfolios should focus more on income and capital preservation. This means that majority of your assets should be channeled into less risky environments such as bonds. While this does not guarantee a high return potential, it will give you enough income to get you through your retirement days. Fortunately, there are numerous experts such as David Eifrig who offer guidance on long term investment strategies to help you build the best retirement portfolios.
- Calculate your Expected Retirement Income
Determine your anticipated income from various sources such as employer pensions and social security. You might also receive more funds from your savings and investment account or any wage you might earn during retirement. The rule of the thumb states that once in retirement, you can afford to save 4% of your portfolio every year. When you include your savings, pensions, and social security, is it enough to give you the post-retirement life you dream of?
For most of us, retirement is about slowing down, not coming to a complete halt. Maybe you want to continue working even post-retirement or want to transform your skills into a consultation or teaching gig to keep you busy. Take all these potential earning opportunities into account as they can help much post-retirement.
- Determine your Retirement Needs
It is time to sit down and envision life in your 70s. Evaluate your after-retirement goals and spending habits to help you determine the most accurate size for your portfolio. For instance, you might want to spend your golden years enjoying the serenity of your quiet retirement home. In this case, you might need less savings than someone who wants to travel and explore the world after retirement. You might also need more savings if you intend to fund your children’s education or even buy a home post-retirement. Remember that the cost of living, including food, fuel, and health care, increases each year. Ensure that all these outlays are featured in your overall retirement plan, which should be updated every year to help you keep track of your progress.
More importantly. you might have to contribute even more to your retirement account than you thought. What looks like a lot of savings will seem smaller with time. Therefore, it is crucial that you have an accurate estimate of future expenses to determine the expected withdrawal rates after retirement.
Be careful not to underrate your expenses, as you might quickly outlive your portfolio. Similarly, if you overstate your future expenses, you might not be able to live the life you always wanted before and after retirement. Ideally, an accurate retirement plan should feature early retirement needs and activities, factor in unexpected needs in middle of retirement, and account for possible late retirement medical costs. Your withdrawal rate should be customized depending on certain factors such as age, risk tolerance, and gender.
- Work on Being Debt-Free
Improve on your mortgage payments to ensure that you clear off the loan before your retirement. You can also consider paying cash for big purchases to avoid accumulating credit card debts. The idea is to work on your existing debts and avoid new debts. This way, none of your retirement savings will be channeled to loan repayments.
- It’s Never too Early to Start
The perfect retirement should be a combination of three things; happiness, health, and wealth. It might seem like a distant occasion when your retirement day is over ten years away. However, you should start early, set realistic goals, and plan carefully so that it does not catch you by surprise. Planning early gives you enough time to prepare for the type of retirement you have always envisioned. Whether you started planning for you retirement late or you are yet to start, it is never too late to start preparing and planning for a comfortable and fulfilling retirement.