A day comes in everyone’s life when they have to punch out that last time and step into the life of retirement no matter how much one is devoted to their work. When retirement arrives, one needs to have a robust financial backing to live a happy and satisfied life thereafter.
How to Plan for Retirement?
The primary goal for a retired life is financial stability that is achieved throughout one’s active working life. Thus, one needs to collect enough money in savings to support this plan of financial stability. The money saved should be enough to keep a person’s lifestyle without a pay check. However, one also needs to consider the taxes, understand and determine the investments that will grow the money in the best possible way, try to find out other sources of income during retirement, and plan appropriately for the retirement expenses.
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Retirement Accounts
While planning for retirement, an individual’s top priority must be to save money. Financial experts always agree and advise on saving at least 10% of the income and maybe even suggest stretching up to 20% if an individual can. However, one needs to understand that it is not just about saving or how much to save, but also about where to save the money.
Nowadays, many employers are offering 401(K) plans as an incentive to create a particular tax-advantaged retirement account. These 401(K) plans are the most popular plans offered by employers, allowing individuals to contribute their pre-tax income towards their retirement with every monthly pay check.
Other retirement accounts can also be independently opened by an employer. Among them, the most popular one is the traditional Individual Retirement Account or IRA, similar to 401(K). In this conventional variety, money is contributed before taxes are paid, and later on, the funds can be deducted from an individual’s tax payment. The other type, known as the Roth IRA, has money to be contributed after the tax payment, but in this case, an individual cannot take a tax deduction on the plan. The money keeps on growing in the account and can be withdrawn only after retirement, and that too tax-free.
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Investing Your Savings
It is simply not enough to have a good amount of money in just a tax-advantaged retirement account. One should try to make money grow and multiply by investing it smartly. Though it is good to have enough money in the savings accounts to meet the expenses and emergencies, it is also important and helpful to think about other options wherein you can invest your money and keep pace with inflation. It is because the savings account does not provide enough interest.
One should remember that the time value of money states that money earned today should be more than money earned in the future; that is, money is invested today to gain the interest later. So,
if you have enough to cover the expenses and emergencies, then consider investing the rest of the money wisely.
Portfolio Allocation
The question that arises now is, where should one invest the money? There are hundreds of options and a lot of information available on this topic. The ‘100 minus age’ is a well-known thumb rule to decide on one’s portfolio allocation. One must transfer more funds to the mutual funds and bonds the older they get.
Many modern investors believe that this method is outdated and should instead be replaced by 110 minus the age or should include higher numbers for higher risk-bearing. However, it entirely depends upon the individual’s risk-bearing capacity, investment goals, and strategy for investment. One should try to find options for long-term investments that may work better, considering the market fluctuation.
Also, rather than investing directly in the stock market and taking a risk with retirement savings, try to put the money in index funds, mutual funds, exchange-traded funds, even bonds or metals. In this way, an individual doesn’t face the risk of losing money just before retirement. Also, one can select a traditional IRA or Roth IRA or go for plan 401(K) to play safe.
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Your Retirement Income and Expenses
The money that an individual gathers over time in their retirement accounts will form a base for their retirement income. Upon reaching retirement age, an individual can start withdrawing money systematically from those accounts as an income.
But only the traditional sources such as IRAs and 401(K)s aren’t the sources of retirement income. Some of them may even have ‘pension’ as one option that provides a guaranteed stream of income and is determined by an individual’s record of employment years and previous income.
Then there is also a ‘Social Security System’ that provides regular checks from the government, which comes with the advantage of the longer a person waits to claim it, the more significant is the check but is subject to taxation. Other ways beyond these may be risky but may earn an individual more income, such as life insurance products that provide guaranteed income over a given period.
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Planning for Expenses
While making a financial plan for retirement income, one should consider expenses that could be slightly different during old age. As individuals get older, they may need to spend more on medical bills or may have significantly fewer household expenses. A perfect retirement plan must anticipate any switch in the costs and make sure that the various sources of income in retirement can cover these expenses.
