Traditional retirement can be an attractive prospect, while others may prefer semi-retirement or continue working after retiring. Whichever approach is right for you, it is crucial to plan for the future and create an actionable strategy for it.
Budgeting and saving are important steps, but determining what income replacement you’ll require during retirement – including healthcare costs – should also be on your list.
1. Set Goals
An important part of retirement planning involves setting and reaching your goals, which will allow you to create an actionable financial plan that balances aspirations with realistic realities such as budgeting, debt reduction and portfolio stress testing.
Goal setting helps drive your savings strategy, such as determining how much and when you should save for retirement. In addition, goals influence lifestyle decisions like where to live and the activities you pursue.
Setting SMART (specific, measurable, attainable, results-focused) goals can help keep you on the path towards achieving your savings target. Setting them as soon as possible is essential – time is your greatest ally when saving for retirement – the sooner you start saving, the greater its growth potential through compound interest and inflation.
Establish an emergency fund or pay off debt can also help increase confidence about one’s financial future and prepare one to deal with all of the challenges associated with entering retirement.
2. Create a Budget
Many retirees dream of living a luxurious, carefree life upon retirement, but careful financial planning must take place for this dream to become a reality. A key component of this process is creating a budget which helps manage income and expenses to ensure you have enough funds for all of your needs during retirement.
A realistic budget should involve reviewing expenses, tracking spending and accounting for potential cost increases. For instance, extensive travel during retirement can be expensive – having flexibility to travel off-season or to cheaper areas can reduce these expenses significantly.
Your retirement income sources, such as pensions or Social Security payments, as well as savings accounts like 401(k) and IRA, must all be carefully taken into account. In addition, it’s important to account for taxes as some states levy Social Security taxes as part of retirement income calculations.
Some costs may remain similar in retirement to before. You’ll still need money for food, entertainment and utilities; however, other expenses could differ, including transportation (gas/car insurance/metro fees/transportation subsidies/etc) and healthcare costs (such as Medicare premiums which don’t disappear as you retire).
3. Review Your Investments
As retirement approaches, it’s essential that you conduct an in-depth financial audit. This can help determine if your savings plan will provide enough income during retirement or whether alterations should be made accordingly.
As part of your retirement plan, it may be prudent to shift some money into safer or lower-cost investments, while considering ways to mitigate sequence of returns risk (the tendency for your investment returns to decline in early years of retirement) by including guaranteed income into your plan – such as lifetime annuities or delaying when to claim Social Security.
inflation can erode the buying power of fixed income investments such as bonds and CDs, leading to reduced purchasing power over time. One effective strategy for mitigating inflation may be investing in real estate or commodities that tend to gain value over time, or diversifying your portfolio with low-volatility assets like short-term bonds or bond ladders.
As retirement draws nearer, your smart strategies for amassing savings may need to change as you near and enter it. Review your portfolio mix to ensure it reflects your goals, return needs, risk tolerance and time horizon. And be ready to rebalance as necessary by shifting assets back into cash so they remain within their target allocations.
4. Pay Off Debt
As you near retirement, the last thing you should be making rash financial decisions that could compromise your future. To protect yourself, carefully assess both current and projected income in relation to daily living expenses; for instance, do you have enough saved in tax-advantaged retirement accounts such as 401(k)s and IRAs in order to cover the cost of retirement lifestyle expenses?
Keep in mind that once you stop working full time, many expenses may change or reduce dramatically, with costs like commuting costs and dining out likely reducing but healthcare bills increasing. Review your investment strategy; if retirement is imminent, shifting investments towards safer assets such as bonds or dividend-paying stocks might be wiser.
Eliminating debt is another essential step towards retirement preparation. If you own a mortgage or auto loan, refinancing could reduce interest payments faster; with credit card debt you can use alternative approaches such as snowball and avalanche payments to pay down balances faster – either of these methods could work wonders on balance reduction.
As the final step to reaching your retirement goals, make sure you’re saving enough to meet them. A general rule of thumb for saving 10% to 15% of each paycheck into tax-advantaged accounts such as 401(k), 403(b), traditional or Roth IRA (whichever best meets your needs ).