Retirement is a fantastic phase of life where we say goodbye to the daily grind and greet a new chapter of rest and enjoyment. It is the perfect opportunity for you to enjoy the fruits of your previous endeavors, embrace quality moments with your loved ones, explore new destinations, and engage in personal passions that may have been neglected due to your work or business commitments.
However, the concept of retirement has also evolved over time. As societies have developed, the expectations and possibilities related to retirement have also shifted. In earlier times, retirement was generally viewed as a period where one could enjoy the rewards of hard work and take a much-needed break. While this traditional perspective on retirement still applies to certain individuals, most people have modified their definitions of what it means to retire.
Today, retirement is considered an opportunity to seek new experiences, keep learning throughout life, and make meaningful contributions to society. It's all about welcoming new chances and maintaining life to its fullest rather than simply wrapping up. Retirement provides a chance to pursue one's true interests, whether that's starting a new venture, volunteering for an important cause, or fulfilling a lifelong dream.
Besides, nobody wants to work until they catch their last breath. Even if you are one of the few who plan to, your body and health might not support you. So, let’s dig in to help you plan for retirement and prosper in the years after you leave working life.
Importance of Retirement Planning
Planning for retirement allows you to figure out the money that you require to retire and how you are going to achieve it. Having a solid retirement plan in place is essential for securing your financial well-being and maintaining your ideal standard of living as you enter your later years. The sooner you make your plan, the quicker you’ll be able to achieve your financial goals.
On the contrary, if you do not make a retirement plan, you might encounter the risk of facing financial constraints later in your life and end up working longer than you’d like. Even if you’re someone who never wants to retire, it's important to take a moment and reconsider your plans, as life is unpredictable, and you might have to face unavoidable circumstances, including health issues, losing your job, or any other responsibilities. Planning for retirement while also working towards your savings goals is the best combo to having an ideal retirement.
How Retirement Planning Works
In the simplest words, retirement planning is something people do to be prepared for life after their paid working journey ends, certainly in terms of money but also in other areas of their lives. Multiple non-financial aspects to consider include how to spend your time, where to live after your retirement, and when to retire, among other things.
When it comes to retirement planning, it's important to take an in-depth strategy that takes a look at all of these different areas. Retirement planning becomes a greater priority at different points in life. For instance:
- During the early stages of one's career, retirement planning primarily involves saving a sufficient amount of money for the future.
- In the middle of your career, you may also consider setting specific revenue or asset goals and taking practical steps to reach them.
- Once you reach retirement age, you transition from building up assets to what planners refer to as the distribution phase. You are no longer contributing to your retirement account(s). Instead, your savings begin to produce returns for you over time.
Moreover, before you choose a retirement plan, you must be clear about your needs and your goals. If you have several years until retirement and are looking to build a corpus, you may consider a retirement savings plan. If you are getting close to retirement and have a certain amount of money to invest, you have the option of selecting a retirement annuity plan.
By opting for a retirement savings plan, you will receive a significant amount of money when you reach retirement age. One option is to consider investing the lump sum amount or a portion of it in an annuity plan, which can be your income stream for life.
Meanwhile, if you decide to invest in retirement annuity plans, it will allow you to receive a consistent income on a monthly, quarterly, semi-annual, or annual basis, depending on your preference. You can choose to start receiving payments immediately or at a later date to suit your needs.
Quick Tidbit: Retirement plans can vary based on your location. As an example, workplace-sponsored plans in the United States and Canada have their own unique systems.
How Much Do You Need to Retire?
It's important to keep in mind that retirement planning should be done prior to your retirement. It's always best to get started as early as possible. The calculation of your magic number, which represents the amount needed for a comfortable retirement, is customized specifically to your circumstances. However, several guidelines can provide you with an indication of how much to save. How much you need to save to retire depends on who you ask. For instance:
- It used to be said that you need about $1 million to retire well.
- Others mentioned the 80% rule, which says you should have enough money saved to live on 80% of your income when you retire. That means that if you made $100,000 a year, you would need to save enough money to bring in $80,000 a year for about 20 years, or $1.6 million when you add in the money that your retirement assets
- Some argue that many retirees are not saving enough to meet those benchmarks and may need to make adjustments to their lifestyle in order to live within their means.
It's necessary to take into account all of your expenses, in addition to the amount of money you'll want to have in your nest egg. Ensure you include housing costs, medical insurance, clothing, groceries, and transportation. And since you’ll have the extra time, you should also consider the expenses for leisure activities and travel. Although it can be challenging to provide exact numbers, it's important to provide a realistic estimate to avoid any unexpected surprises in the future.
Quick Tip: It is recommended to begin as soon as possible with the method you choose, along with the help of a financial planner, to assess your retirement savings needs.
Steps to Retirement Planning
No matter what stage of life you're in, there are a few essential steps that are relevant to almost everyone when it comes to planning for retirement. Here are some of the most general ones:
- Develop a strategy. It involves making choices about the timing of your savings, your preferred retirement age, and the amount you aim to save for your ultimate goal.
- Calculate the amount you will allocate every month. By using automatic deductions, you can effortlessly stay on track and eliminate the need to manually deposit money.
- Select the most suitable accounts for your needs. Take advantage of the opportunity to invest in a 401(k) or a similar account if your employer provides that option. Keep in mind that if the company provides an employer match and you choose not to sign up, you're essentially losing additional money. Also, remember to set aside some money for unforeseen emergencies.
- It's important to regularly monitor your investments and make any necessary changes. It's always beneficial to make adjustments whenever there's a shift in your lifestyle or when you transition into a new phase of life.
Late-Stage Retirement Strategies/Tactics
People nearing retirement age and lacking significant savings may face some challenges ahead. However, there are specific measures that can help you grow your savings quickly, ensuring that you have some financial support during retirement.
1. Consider Home Equity
Although a home is not typically relied upon as a main source of retirement income, it can offer financial flexibility in retirement. To achieve this, older individuals might think about borrowing against the equity in their homes to fund living expenses. Many people have a significant amount of their wealth invested in real estate properties.
There are numerous ways to take advantage of this approach to finance your retirement. One option is to utilize a home equity line (HELOC) that can be accessed as needed. Alternatively, you could consider selling your current property, downsizing, and relying on the equity for your living expenses.
Regardless of your decision, it's extremely important to take note of how it will affect your monthly income. As Kirk Chisholm, a wealth manager at Innovative Advisory Group in Lexington, Massachusetts, says, “People are living longer than decades ago, so it is important to make sure you can have a sustainable income for many years to come.”
A reverse mortgage could be a viable option for older borrowers, as lending institutions may offer more favorable repayment terms that suit their needs best. Moreover, for older individuals, it may be worth considering selling their primary residence and downsizing to a smaller and more affordable home. For many people, a large house becomes unnecessary once their children have moved out.
Finally, think about the cost of living in the location you might be moving to before making a decision, especially if it's not a simple downsize within your neighborhood. In other words, you should check that the cost of living, including housing and food, is more affordable than where you currently reside.
2. Fully Fund Your 401(k)
Anyone in this age bracket who has access to a 401(k) plan through their employer should seriously consider contributing the full amount. To give you an idea of the impact that contributing the maximum to a 401(k) can have, consider the following:
A person might save over $1.3 million by the time they are 65 years old if they start saving at the age of 40 and put $17,500 per year into a 401(k). This calculation is based on an assumed 8% return and does not factor in any contributions from your employer.
It's clear that this savings tool is highly effective, which is why workers approaching retirement should prioritize funding their 401(k)s as early as they can. As Martin A. Federici, Jr, says: “Factoring in no growth at all if you can sock away $24,000 a year from age 50 to age 60 (11 years), that’s 264,000 more saved for even the earliest unpenalized retiree. An extra $250,000-plus saved before retiring can make or break an income-producing portfolio lasting throughout retirement.”
3. Contribute to a Roth IRA
Roth IRAs provide investors with a convenient method to save and increase funds while deferring taxes. There are certain restrictions on income. In 2023, if you're single and earn a modified adjusted gross income (MAGI) of $138,000 ($146,000 for 2024) or higher annually, your contribution limit will be decreased.
Married individuals who file jointly need to be aware of certain contribution limitations if their MAGI reaches $218,000 for 2023 ($230,000 for 2024). For 2023, if your income reaches or exceeds $228,000 ($240,000 for 2024), your contribution limit is nil. What is the maximum amount that can be saved in a Roth account? Look at the following example for better understanding:
By age 65, an individual who consistently invests $6,000 per year and earns an annual rate of return of 8% has a chance of earning over $473,726. Someone can save up to $190,000 by age 65, even if they start saving at age 50 and contribute $6,500 per year. It's worth noting that the annual contribution limits for both traditional and Roth versions of IRA are $6,500 for 2023 and $7,000 for 2024. Individuals who are 50 years old and above can make a catch-up contribution of $1,000.
As per Michelle Buonincontri, CFP®, CDFA™, an expert in divorce mediation based in Scottsdale, Arizona: “Maximizing your Roth IRA contributions and utilizing Roth conversions when appropriate can really make sense. When you open a Roth IRA and stick to the withdrawal guidelines, you can avoid paying taxes on your earnings and compounding them tax-free. This opens the door to potential tax savings during withdrawals, which can help your retirement savings accumulate and last longer by reducing your taxable income.”
Important Note: If your spouse is not employed, you may still have the opportunity to make IRA contributions on their behalf, thanks to the special spousal IRA rules.
4. Take Your Deductions
It's worth mentioning that standard deductions may not be suitable for everyone. Actually, if you have significant mortgage interest, deductible taxes, unreimbursed business expenses, or charitable donations, it likely makes sense to itemize your deductions.
Consulting with a certified public accountant can help you assess your circumstances and decide if itemizing is a feasible option. Make it a routine to save receipts and maintain organized records. Keep in mind, ultimately, it's not just about how much you earn but how much you can set aside, especially as retirement approaches.
5. Tap Into Cash Value Policies
When it comes to using an insurance policy for its cash value, it's important to remember that this should only be done as a last resort. However, if the original reason for having the insurance no longer applies, it might be worth considering cashing it out. Even so, it is advisable to seek guidance from a tax advisor and an insurance professional to assess your specific requirements before making any decisions about canceling a policy or getting its cash value.
Final Words
Everyone dreams of the day when they can finally bid farewell to the workforce and enjoy their retirement. However, there is a financial aspect to think about. That is the time when retirement planning becomes essential.
Planning for retirement is an important step in ensuring a financially secure future. By establishing clear objectives, determining your retirement requirements, developing a savings strategy, spreading out your investments, and keeping track of your advancement, you can strive for a comfortable retirement.
