Retirement planning is one of the most critical financial decisions an individual makes during his lifetime. Retirement plans are tax-advantaged instruments that enable you to save and build up a large corpus, ensuring that you do not run out of savings during your retirement years. Retirement plans help one stay disciplined and systematic in their savings pattern. Generally, retirement plans hold dual benefits of creating wealth over time and providing insurance cover.
When you are young, the thought of retirement planning may not be on your priority list. Although retirement might seem too far away to start thinking about it, it is always advised to start saving for a comfortable retirement early on.
Most people realize later in life that they are already too late and may not have enough savings for retirement. It has been estimated that only half of the American citizens have tried to calculate the amount they will need to fund their daily necessities and other financial goals during their retirement years when they will no longer earn any direct income. In 2020, it was revealed that more than a quarter of workers working in the private sector did not make use of their retirement accounts. Moreover, with an increase in the lifespan, an average retiree needs to have a larger savings pool to cover their expenses during their golden years. If you are looking for guidance on how to build a substantial retirement corpus for retirement, do reach out to a professional financial advisor who can advise you on the same.
Keep reading to find out the steps you can take to help ensure you are prepared for retirement:
Start saving and be disciplined with your finances
The first and most essential step towards retirement planning is saving regularly. Even if you can only save a meager amount initially, it is worth doing so. As time passes, you can increase the amount you set aside for saving. The sooner you start saving, the more savings you will accumulate by the time you reach retirement age. The power of compounding also plays a vital role in increasing your wealth over time. Hence, add retirement savings to the top of your priority list and diligently set your goals.
Know your retirement needs
Not all retirees have the same goals. Some may wish to travel; others may want to build a house. It is, therefore, paramount to understand your retirement needs before formulating a plan. Do not forget to take into account your daily expenses and other additional goals. Hence, the essence of a successful retirement plan is to have a forward-looking approach.
Invest in an employer’s retirement savings plan
Find out if your employer offers a retirement savings account such as the 401(k) plan. Make sure that you sign up for the plan and contribute as much as possible. Opening up a 401(k) by your employer will help you save taxes, and automatic deduction will be easier. As time passes, you will realize that tax deferrals and compound interest make a huge difference in increasing your sum for retirement.
Make yourself aware of all the details about the employer’s retirement savings plan, like the minimum amount you need to contribute to get the total employer contribution, the number of years you need to stay invested in the plan, and more.
Look into your employer’s pension plan
Figure out if your employer has a pension plan and if you are covered under it. Understand the type of pension plan your employer holds, its details, and how it works. You could ask for an individual benefit statement to figure out how much you stand to make. Also, enquire about what will happen to the pension benefit if you change your job in the future. In addition, figure out if you get any benefits from your previous employer. Learn if you stand to profit from your spouse’s plan.
Observe basic investment principles
Solely focusing on the amount to be saved is not enough; you should also think of saving. How you invest your savings is equally important to ensure you do not lose them to inflation or other market uncertainties. Be aware of how your savings have been invested under your savings or retirement plan.
It is always good to divide your savings into different investment vehicles. Diversification will help minimize your portfolio’s overall risk and provide higher returns. The asset allocation in your portfolio may constantly change with time according to changing priorities. Several factors affect your portfolio, like your financial goals, age, and financial position. You need to have good understanding and financial knowledge to be financially secure.
Avoid withdrawals from your retirement savings
If you withdraw your retirement savings in the middle, you will stand to lose the principal amount and the interest earned. You might also be required to pay withdrawal penalties and give up tax benefits. In case of unprecedented events like a job change, make sure you do not pull out your savings from your current retirement plan. Instead, you can choose to transfer them to a Roth IRA account. You can even look up what your new employer’s retirement plan offers and transfer your savings to them.
Transfer your savings into an IRA
Opening an IRA account (Individual Retirement Account) is a common way to start your retirement planning. Every year the Internal Revenue Service (IRS) updates the annual contribution limits for IRAs. For 2022, you can contribute up to $6000 to your IRA accounts or an additional $1000 bringing your total to $7000 if you are 50 years or older. IRA also provides tax benefits to its holders. You can choose between opening a traditional IRA or a Roth IRA. The taxes that may be applied to your contributions will depend on which account you choose from the two mentioned above.
Moreover, the after-tax value of your retirement fund will also depend on the type of account you select. IRAs act as a tool for easy and secure savings. You also have the option of setting up your IRA in a way that it automatically deducts an amount from your checking or savings account and transfers it to the IRA.
Learn about your Social Security benefits
On average, social security benefits account for almost 40 percent of one’s preretirement income. Thus it is important to figure out details about your social security benefits and delay taking them to maximize your returns. You can try estimating the worth of your social security benefits by visiting the social security administration’s website.
Consult a qualified and vetted financial advisor
Lastly, it is important to clarify any queries you might have regarding your retirement plans, investment strategies, tax implications, estate plan, and more with a financial expert who can advise on how to best use your funds and save for retirement.
To summarize
Retirement planning is arguably the most important decision in one’s life. You do not need a large sum of money to start saving. With even minimal savings, retirement planning can be commenced. It is best to start saving for retirement as early on as possible to harness the power of compounding. Also, it is highly advised to choose to hire a financial advisor to help get practical advice for your savings and investments and chart a plan suitable to your needs.